UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
SCHEDULE
14C
Information
Statement Pursuant to Section 14(c)
of
the Securities Exchange Act of 1934
Check the
appropriate box:
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Preliminary
Information Statement
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¨
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Confidential,
for use of the Commission only (as permitted by Rule
14c-5(d)(2))
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x
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Definitive
Information Statement
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CHINA INSONLINE CORP.
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(Name
of Registrant as Specified in
Charter)
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Payment
of Filing Fee (Check the appropriate box):
o
No Fee
required.
x
Fee computed on
table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title
of each class of securities to which transaction applies:
Ownership
of 100% of Ding Neng Holdings Limited
(2)
Aggregate number of securities to which transaction applies:
Ownership
of 100% of Ding Neng Holdings Limited
(3) Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which filing fee is calculated
and state how it was determined):
The
maximum being paid for the ownership of 100% of Ding Neng Holdings Limited is
$1,071. The transaction value is based on the average of the high and
low price of the registrant’s common stock reported on the NASDAQ Capital Market
on November 10, 2010.
(4)
Proposed maximum aggregate value of transaction:
$5,352,100
(5) Total
fee paid:
$1,071
x
Fee paid
previously with preliminary materials.
o
Check box if any
part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and
identify the filing for which the offsetting fee was paid previously. Identify
the previous filing by registration statement number, or the Form or Schedule
and the date of its filing.
(1)
Amount Previously Paid:
(2) Form,
Schedule or Registration Statement No.:
(3)
Filing Party:
(4) Date
Filed:
CHINA
INSONLINE CORP.
Room 42,
4F, New Henry House, 10 Ice House Street
Central,
Hong Kong
(011)
852-25232986
NOTICE
OF STOCKHOLDER ACTION
TO
BE TAKEN WITHOUT A MEETING
Dear
Stockholders of China INSOnline Corp.:
The
purpose of this letter and the enclosed Information Statement is to inform you
that the stockholders holding a majority of our issued and outstanding shares of
common stock, par value $0.001 per share (“Common Stock”) have executed written
consents in lieu of a meeting to approve:
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(1)
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the
acquisition (the “Acquisition”) by us, China INSOnline Corp. (the
“Company”), by the issuance of shares of Common Stock representing 90% of
the Common Stock issued and outstanding immediately following the closing
of the Acquisition, for 100% of Ding Neng Holdings Limited, a BVI holding
company (“Ding Neng Holdings”), that owns 100% of Ding Neng
Bio-technology Co., Limited, a Hong Kong company (“DBT”), which owns 100%
of Zhangzhou Fuhua Biomass Energy Technology Co., Ltd. (“Fuhua”), a
foreign investment enterprise organized under the laws of the People’s
Republic of China, or PRC, and which has, through various contractual
agreements, management control and the rights to the profits of Fujian
Zhangzhou Dingneng Bio-technology Co., Ltd. (“Ding Neng Bio-tech”), a
corporation organized under the laws of the PRC, which engages in the
production, refinement and distribution of bio-diesel fuel in southern
China. The Acquisition is being made pursuant to a Share
Exchange Agreement, dated November 12, 2010, and amended on December 6,
2010 (the "Share Exchange Agreement, as amended"), between the
Company, Ding Neng Holdings and the shareholders of Ding Neng Holdings, as
identified therein (the “Ding Neng Holdings Shareholders”). The completion
of the Acquisition will result in the change of control of the Company
under the NASDAQ Stock Market Rules. The closing of the
Acquisition will take place on or after
January 20,
2011.
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(2)
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An
amendment to the Company’s Certificate of Incorporation, as amended (the
“Certificate of Incorporation”) to effect a reverse stock split at a ratio
of one-for-forty (the “Reverse Stock Split”). We are effecting
the Reverse Stock Split pursuant to the Share Exchange Agreement, as
amended, primarily to increase the value of our per share stock price
such that the post-Acquisition entity will be able to meet the initial
listing requirements of the NASDAQ Capital Market and remain listed
thereon.
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(3)
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An
amendment to the Company’s Certificate of Incorporation to change the
Company’s name from and after the closing of the Acquisition to China
Bio-Energy Corp. (the “Name
Change”).
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On
November 11, 2010 and December 6, 2010, the Company’s board of directors and
stockholders collectively holding approximately 55% of the Company’s outstanding
Common Stock, respectively, executed written consents approving (1) the
Acquisition pursuant to the Share Exchange Agreement, as amended, (2) the
Reverse Stock Split, and (3) the Name Change. The consents we have received
constitute the only stockholder approval required for such items under the
Delaware General Corporation Law (the “DGCL”) and the Company’s existing
Certificate of Incorporation, as amended, and its Amended and Restated Bylaws.
Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as amended,
stockholder approval of the Acquisition, the Reverse Stock Split and the Name
Change will become effective on or after
January 20,
2011
, which is 21 calendar
days following the date we first mail the Information Statement to our
stockholders. As soon as practicable after such date, we intend to
consummate the Acquisition and file a Certificate of Amendment to our
Certificate of Incorporation with the Secretary of State of Delaware effecting
the Reverse Stock Split and Name Change.
We are
furnishing the Information Statement to you solely to inform you of the approval
of the Acquisition, the Reverse Stock Split and the Name Change by the holders
of a majority of the Company’s issued and outstanding Common
Stock. Section 228 of the DGCL requires that we notify you of
these approvals because they were obtained by written consent of stockholders in
lieu of a meeting. This letter and the Information Statement are intended to
provide such notice. No action is required by you.
WE
ARE NOT ASKING YOU FOR A PROXY AND
YOU
ARE REQUESTED NOT TO SEND US A PROXY.
The
Information Statement is for information purposes only. Please read
it carefully.
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By
order of the Board of Directors
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Zhenyu
Wang
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Chairman
of the Board of Directors
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CHINA
INSONLINE CORP.
Room 42,
4F, New Henry House, 10 Ice House Street
Central,
Hong Kong
(011)
852-25232986
INFORMATION
STATEMENT
PURSUANT
TO SECTION 14(C) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
WE
ARE NOT ASKING YOU FOR A PROXY AND
YOU
ARE REQUESTED NOT TO SEND US A PROXY.
This
Information Statement (the “Information Statement”) is being mailed on or about
December 30,
2010 to the stockholders of
record of China INSOnline Corp., a Delaware corporation (referred to herein as
“we,” “us,” “our,” or “the Company”), as of the close of business on December 6,
2010 (the “Record Date”). This Information Statement is being
furnished to you for information purposes only, to inform you that holders of
shares representing a majority of our issued and outstanding shares of common
stock, par value $0.001 per share (“Common Stock”) have adopted, by written
consent, resolutions authorizing us to:
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(1)
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Consummate
the acquisition (the “Acquisition”) by us, China INSOnline Corp. (the
“Company”), by the issuance of shares of Common Stock representing 90% of
the Common Stock issued and outstanding immediately following the closing
of the Acquisition, for 100% of Ding Neng Holdings Limited, a BVI holding
company (“Ding Neng Holdings”), that owns 100% of Ding Neng
Bio-technology Co., Limited, a Hong Kong company (“DBT”), which owns 100%
of Zhangzhou Fuhua Biomass Energy Technology Co., Ltd. (“Fuhua”), a
foreign investment enterprise organized under the laws of the People’s
Republic of China, or PRC, and which has, through various contractual
agreements, management control and the rights to the profits of Fujian
Zhangzhou Dingneng Bio-technology Co., Ltd. (“Ding Neng Bio-tech”), a
corporation organized under the laws of the PRC, which engages in the
production, refinement and distribution of bio-diesel fuel in southern
China. The Acquisition is made pursuant to a Share Exchange
Agreement, dated November 12, 2010, and amended on December 6, 2010 (the
"Share Exchange Agreement, as amended") between the Company, Ding
Neng Holdings and the shareholders of Ding Neng Holdings, as identified
therein (the “Ding Neng Holdings Shareholders”). The completion of the
Acquisition will result in the change of control of the Company under the
NASDAQ Stock Market Rules. The closing of the Acquisition will
take place on or after
January 20,
2011.
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(2)
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Amend
our Certificate of Incorporation, as amended (the “Certificate of
Incorporation”) to effect a reverse stock split at a ratio of
one-for-forty (the “Reverse Stock Split”). We are effecting the
Reverse Stock Split pursuant to the Share Exchange Agreement, as
amended, primarily to increase the value of our per share stock price
such that the post-Acquisition entity will be able to meet the initial
listing requirements of the NASDAQ Capital Market and remain listed
thereon.
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(3)
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Amend
our Certificate of Incorporation to change our name from and after the
closing of the Acquisition to China Bio-Energy Corp. (the “Name
Change”).
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Board
of Directors and Consenting Stockholders
On
November 11, 2010 and December 6, 2010, our board of directors (the “Board”)
unanimously adopted resolutions authorizing the Acquisition, the Reverse Stock
Split and the Name Change.
Section 228
of the Delaware General Corporation Law (the “DGCL”) provides that the written
consent of the holders of the issued and outstanding shares of voting capital
stock, having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted, may be substituted for a meeting. In
order to eliminate the costs and management time involved in obtaining proxies
and in order to effect the above actions as early as possible to accomplish the
purposes hereafter described, the Board elected to seek the written consent of
the holders of a majority of our issued and outstanding shares of voting capital
stock to reduce the costs and implement the Acquisition, the Reverse Stock Split
and the Name Change in a timely manner.
As of the
Record Date, there were issued and outstanding 46,000,000 shares of our
Common Stock. These issued and outstanding shares of Common Stock constitute our
only voting securities and each stockholder is entitled to cast one vote for
each share of Common Stock held by the stockholder. On November 11, 2010
and December 6, 2010, stockholders of the Company, who collectively own 55% of
our Common Stock, consented in writing to the Acquisition, the Reverse Stock
Split and the Name Change (the “Consenting Stockholders”). The
Consenting Stockholders included 16,008,960 shares, or 34.8%, held by Zhenyu
Wang, our chief executive officer and chairman of the Board, and 5,280,000
shares, or 11.5%, held by Junjun Xu, a former officer and director.
The
actions described in this Information Statement have been consented to by the
Consenting Stockholders. Accordingly, the written consent executed by the
Consenting Stockholders pursuant to Section 228 of the DGCL and delivered to us
is sufficient to approve the Acquisition, the Reverse Stock Split and the Name
Change, which includes the corresponding amendments to our Certificate of
Incorporation, and no further stockholder vote or other action is
required.
Pursuant
to Section 228 of the DGCL, we are required to provide prompt notice of the
taking of this corporate action without a meeting to the stockholders who are
entitled to vote and have not consented in writing to such action. This
Information Statement is intended to provide such notice.
The
entire cost of furnishing this Information Statement will be borne by
us. We will request brokerage firms, nominees, custodians,
fiduciaries and other like parties to forward this Information Statement to the
beneficial owners of our Common Stock held of record by them and will reimburse
such persons for their reasonable charges and expenses in connection
therewith.
TABLE
OF CONTENTS
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DESCRIPTION
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PAGE
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THE
ACQUISITION TRANSACTION
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1
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MATERIAL
TERMS OF THE ACQUISITION
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1
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SUMMARY
OF THE ACQUISITION
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2
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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6
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RISK
FACTORS
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7
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DETAILS
OF THE ACQUISITION
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19
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THE
SHARE EXCHANGE AGREEMENT, AS AMENDED
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23
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CERTAIN
AGREEMENTS RELATING TO THE ACQUISITION
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28
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INFORMATION
ABOUT CHINA INSONLINE CORP
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29
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DESCRIPTION
OF BUSINESS
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29
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DESCRIPTION
OF PROPERTY
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33
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LEGAL
PROCEEDINGS
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33
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
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34
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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35
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DESCRIPTION
OF THE COMPANY’S COMMON STOCK
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49
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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49
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INFORMATION
ABOUT DING NENG HOLDINGS
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51
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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51
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MARKET
FOR DING NENG HOLDINGS’ COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
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58
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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58
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DIRECTORS
AND EXECUTIVE OFFICERS
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58
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EXECUTIVE
COMPENSATION
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60
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
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61
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BENEFICIAL
OWNERSHIP OF SECURITIES
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62
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AMENDMENT
TO CERTIFICATE OF INCORPORATION FOR REVERSE STOCK SPLIT
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63
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AMENDMENT
TO CERTIFICATE OF INCORPORATION FOR NAME CHANGE
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66
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DISSENTERS’
RIGHTS OF APPRAISAL
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67
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STOCKHOLDERS
SHARING AN ADDRESS
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67
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WHERE
YOU CAN FIND MORE INFORMATION
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67
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INDEX
TO FINANCIAL INFORMATION
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F-1
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Annexes
A – Form
of Share Exchange Agreement
B – Amendment to the Share Exchange Agreement
C –
Certificate of Amendment to Certificate of Incorporation for Reverse Stock
Split
D –
Certificate of Amendment to Certificate of Incorporation for Name
Change
THE
ACQUISITION TRANSACTION
MATERIAL
TERMS OF THE ACQUISITION
This
section summarizes information related to the Acquisition, the Reverse Stock
Split and the Name Change. These items are described in greater detail elsewhere
in this information statement. You should carefully read this entire information
statement and the other documents to which you are referred.
The
parties to the Share Exchange Agreement, as amended, are:
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·
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Ding
Neng Holdings is a company organized and existing under the laws of the
British Virgin Islands. Ding Neng Holdings owns 100% of DBT,
which owns 100% of Fuhua, which has, through various contractual
agreements, management control and the rights to the profits of Ding Neng
Bio-tech, which engages in the production, refinement and distribution of
bio-diesel fuel in southern China;
and
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The
Ding Neng Holdings Shareholders.
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Pursuant
to the Share Exchange Agreement, as amended, within 10 days of being
notified that the conditions to closing have satisfied or waived, the Company
will acquire from the Ding Neng Holdings Shareholders 100% of Ding Neng Holdings
in exchange for shares of Common Stock representing 90% of the Common Stock
issued and outstanding immediately following the closing of the
Acquisition. See “Details of the Acquisition.”
After the
Acquisition is completed, the Company’s existing stockholders are expected to
beneficially own approximately 4% of the outstanding shares of the
Company.
The
closing of the Acquisition is subject to the satisfaction by each party of
various conditions prior to closing. See “The Share Exchange Agreement, as
amended — Conditions to Closing.”
Upon the
closing of the Acquisition, the officers of the Company will be: Sanfu Huang –
Chief Executive Officer, Jingmei Weng – Chief Financial Officer and Zhibin Jin –
Corporate Secretary. See “Details of the Acquisition.”
Immediately
prior to the closing of the Acquisition, the Company shall effect the Reverse
Stock Split. See “Amendment to Certificate of Incorporation for
Reverse Stock Split.”
Upon the
closing of the Acquisition, the Company shall effect the Name
Change. See “Amendment to Certificate of Incorporation for Name
Change.”
SUMMARY
OF THE ACQUISITION
This
summary highlights selected information from this information statement and does
not contain all of the information that is important to you. To better
understand the Acquisition, as well as the other proposals, you should read
carefully this entire document and the other documents to which this information
statement refers you, including the Share Exchange Agreement, as
amended, attached as
Annexes A and
B
to this information statement. The Share Exchange Agreement, as
amended, is the legal document that governs the Acquisition. The Share
Exchange Agreement, as amended, is also described in detail elsewhere in this
information statement.
The
Parties to the Share Exchange Agreement, as amended
The
Company
The
Company currently has no business operations. Prior to winding down
its operations during the quarter ended June 30, 2010, the Company was an
Internet services and media company focused on the PRC insurance industry. The
Company primarily offered a network portal through its industry website,
www.soobao.cn
, to
insurance companies, agents and consumers for advertising, online inquiry, news
circulation, online transactions, statistic analysis and software
development. This primarily entailed the offer of online insurance
products and services in China including (a) a network portal for the Chinese
insurance industry (
www.soobao.cn
),
offering industry professionals a forum for the advertising and promotion of
products and services, (b) website construction for marketing teams and others
in the insurance industry, (c) software development, (d) insurance agency
services whereby the Company generated sales commissions on motor vehicle
insurance, property insurance and life insurance and (e) accompanying client
support services.
The
Company’s principal executive offices are located at Room 42, 4F, New Henry
House, 10 Ice House Street, Central, Hong Kong. Telephone number
(011) 852-25232986
Ding Neng Holdings; Ding
Neng Holdings Shareholders
Ding Neng
Holdings is a company organized and existing under the laws of the British
Virgin Islands. Ding Neng Holdings owns 100% of the outstanding
capital stock of DBT, which owns 100% of Fuhua which controls Ding Neng Bio-tech
through certain contractual arrangements making Ding Neng Bio-Tech a variable
interest entity of Fuhua.
As the
principal operating subsidiary, Ding Neng Bio-tech engages in the production,
refinement and distribution of bio-diesel fuel, which is manufactured from
agricultural products. Currently, the primary ingredients in its biodiesel fuel
are animal fat and plant oil. Ding Neng Bio-tech also operates a biodiesel
manufacturing facility in the Fujian province in the PRC, the aggregate capacity
of which currently produces approximately 40,000 tons of biodiesel
annually.
The
Acquisition; Acquisition Consideration
The Share
Exchange Agreement, as amended, provides for an acquisition transaction in which
the Company through the issuance of shares of Common Stock representing 90% of
the Common Stock issued and outstanding immediately following the closing of the
Acquisition, will acquire 100% of Ding Neng Holdings. Ding Neng
Holdings owns 100% of the outstanding capital stock of Fuhua, which has, through
various contractual agreements, management control and the rights to the profits
of Ding Neng Bio-tech.
The
parties plan to complete the Acquisition as soon as reasonably practical;
provided that the conditions specified in the Share Exchange Agreement, as
amended, have been satisfied or waived.
Management
of the Company Upon Completion of the Acquisition
Upon the
consummation of the Acquisition, the Board will consist of seven directors, as
set forth below. At least four of the directors will be “independent directors”
as defined by the rules of the Securities and Exchange Commission and the NASDAQ
Marketplace Rules. Such independent directors will serve as members of the
audit, nominating and compensation committees.
Upon the
consummation of the Acquisition, the post-acquisition entity’s executive
officers and directors are expected to be:
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Name
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Position / Title
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Xinfeng
Nie
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Chairman
of the Board of Directors
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Sanfu
Huang
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Chief
Executive Officer and Director
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Jingmei
Weng
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Chief
Financial Officer and Director
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Zhibin
Jin
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Corporate
Secretary
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Jianjun
Xu
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Director
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Mingyong
Hu
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Director
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Fulun
Su
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Director
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Bin
Zhao
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Director
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See the
section entitled “Directors and Executive Officers” for biographical information
about the directors and executive officers after the consummation of the
Acquisition.
Approval
of the Shareholders Ding Neng Holdings
All of
the Ding Neng Holdings Shareholders are parties to the Share Exchange Agreement,
as amended. Accordingly, no further action by the Ding Neng Holdings
Shareholders is needed to approve the Acquisition.
Reverse
Stock Split
The
NASDAQ Stock Market has indicated that because the Company does not have any
business operations, it is categorized as a “public shell.” Based on
this status, the post-acquisition entity must meet the initial listing
requirements of the NASDAQ Capital Market which requires a minimum bid price of
$4.00 per share. To ensure that the post-acquisition entity meets
this minimum bid requirement, the Company will effect the Reverse Stock Split
immediately prior to the consummation of the Acquisition.
The
Name Change
Upon
consummation of the Acquisition, the Company will file an Amended and Restated
Certificate of Incorporation to change its name from and after the closing of
the Acquisition to China Bio-Energy Corp.
Interests
of the Officers, Directors and Affiliates of China INSOnline Corp. in the
Acquisition
In
approving the Acquisition, the Reverse Stock Split and the Name Change, the
executive officers and the Board may have had interests in the transaction that
are different from, or in addition to, your interests as a stockholder. These
interests include, among other thing, that upon completion of the
Acquisition:
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Zhenyu
Wang, Mingfei Yang, Yuefeng Wang, Yinan Zhang, Renbin Yu, Yong Bian and
Xiaoshuang Chen will resign as directors and officers of the
Company;
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Pursuant
to an employment agreement, Mr. Wang will be employed by the
post-acquisition entity for a term of two years at an annual salary of
$150,000 and equity of the post-acquisition entity equal to 1% upon
execution of the employment agreement, plus an additional 0.5% over the
term of the employment agreement (0.25% after the first year and 0.25%
after the second year);
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Mr.
Wang, our chief executive officer and chairman of the board, will own 1.4%
of the post-acquisition entity not including the equity received pursuant
to the employment agreement with the post-acquisition entity;
and
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Junjun
Xu, currently an 11.5% shareholder, will own 0.5% of the post-acquisition
entity.
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Conditions
to the Closing of the Share Exchange Agreement, as amended
The
consummation of the transactions contemplated by the Share Exchange Agreement,
as amended, is subject to a number of other conditions to the obligations of
each of the parties to complete the Acquisition, including the accuracy of each
of the parties’ representations and warranties, the compliance by each party
with its covenants and obligations, the delivery of certain ancillary documents
and the Company’s continuous listing on the NASDAQ Capital Market, the OTC
Bulletin Board or the Pink Sheets. See “The Share Exchange Agreement, as
amended – Conditions to Closing.”
Exclusivity;
No Other Negotiation
The Share
Exchange Agreement, as amended, contains detailed provisions prohibiting
each of the Company, Ding Neng Holdings and the Ding Neng Holdings Shareholders
from seeking an alternative transaction. These covenants generally prohibit the
Company, Ding Neng Holdings and the Ding Neng Holdings Shareholders, as well as
their officers, directors, subsidiaries, employees, agents and representatives,
from taking any action to solicit an alternative acquisition
proposal.
Quotation
The
Company’s outstanding Common Stock is quoted on the Pink Sheets under the symbol
CHIO.PK. Ding Neng Holdings has submitted an initial listing application to
NASDAQ on behalf of the future post-acquisition entity for the listing of common
stock on the NASDAQ Capital Market. NASDAQ’s approval will require that the
post-acquisition entity meet NASDAQ’s initial listing requirements. There
is no assurance that the post-acquisition entity will meet NASDAQ’s initial
listing requirements. If the post-acquisition entity does not meet
NASDAQ’s initial listing requirements, we expect the Common Stock to continue
to be quoted on the Pink Sheets.
Material
Federal Income Tax Consequences of the Acquisition
The
following section is a summary regarding material United States federal income
tax consequences of the Acquisition to holders of Common Stock. This discussion
addresses only those security holders of the Company that hold their securities
as a capital asset within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended, or the Code, and does not address all the
United States federal income tax consequences that may be relevant to particular
holders in light of their individual circumstances or to holders that are
subject to special rules, such as:
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financial
institutions;
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investors
in pass-through entities;
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tax-exempt
organizations;
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dealers
in securities or currencies;
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traders
in securities that elect to use a mark to market method of
accounting;
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persons
that hold Common Stock as part of a straddle, hedge, constructive sale or
conversion transaction; and
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persons
who are not citizens or residents of the United
States.
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This
summary of material federal income tax consequences is based upon the Code,
applicable treasury regulations thereunder, published rulings and court
decisions, all as currently in effect as of the date hereof, and all of which
are subject to change, possibly with retroactive effect. Tax considerations
under state, local and foreign laws, or federal laws other than those pertaining
to the income tax, are not addressed.
Neither
the Company nor Ding Neng Holdings intends to request any ruling from the
Internal Revenue Service as to the United States federal income tax consequences
of the Acquisition.
It is
anticipated that the Acquisition will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code and no gain or loss
will be recognized by the Company, Ding Neng Holdings, or their respective
shareholders as a result of the Acquisition.
This
discussion is intended to provide all material United States federal income tax
consequences of the Acquisition to the Company and its stockholders who hold
their stock as a capital asset. This discussion is not a complete analysis or
description of all potential United States federal tax consequences of the
Acquisition to other holders who are subject to special rules. It does not
address any non-income tax or any foreign, state or local tax consequences of
the Acquisition. Accordingly, you are strongly urged to consult with your tax
advisor to determine the particular United States federal, state, local or
foreign income or other tax consequences to you of the Acquisition.
Anticipated
Accounting Treatment
The
Acquisition will be accounted for as a reverse merger, whereby Ding Neng
Holdings will be the continuing entity for financial reporting purposes and will
be deemed to be the acquirer of the Company. The Acquisition is being accounted
for as a reverse merger because after the Acquisition the former Ding Neng
Holdings Shareholders will hold the majority of the outstanding shares of the
Company and will have the ability, initially, to appoint the majority of the
members of the board of directors of the Company.
In
accordance with the applicable guidance for accounting for the Acquisition as a
reverse merger, first Ding Neng Holdings will be deemed to have undergone a
recapitalization, whereby its outstanding ordinary shares were converted into
shares of Common Stock. Immediately thereafter Ding Neng Holdings, which is the
continuing accounting entity, will be deemed to have acquired the assets and
assumed the liabilities of the Company in exchange for the issuance of the
Company’s shares. However, because the Company will not have any
assets and liabilities at the time of consummation of the Acquisition, the
proposed transaction will have no impact on the historical assets and
liabilities of Ding Neng Holdings.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
information statement contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than statements of
historical facts, included in this information statement regarding the Company’s
and Ding Neng Holdings’ strategy, future operations, future financial position,
future revenues, projected costs, prospects, plans and objectives of management
are forward-looking statements. The words “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying
words.
The
parties may not actually achieve the plans, intentions or expectations disclosed
in the forward-looking statements, and you should not place undue reliance on
the forward-looking statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the forward-looking
statements made by the parties. The parties to this information statement have
included important factors in the cautionary statements included in this
information statement, particularly in the “Risk Factors” section, that the
parties believe could cause actual results or events to differ materially from
the forward-looking statements made by the parties, including, among
others:
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legislation
or regulatory environments, requirements or changes adversely affecting
the business in which Ding Neng Holdings is
engaged;
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continued
compliance with government
regulations;
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fluctuations
in customer demand;
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management
of rapid growth;
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the
time to develop and market new
products;
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general
economic conditions;
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geopolitical
events; and
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changes
in accounting principles generally accepted in the United
States.
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Further,
the forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures, collaborations, dividends
or investments made by the Company or Ding Neng Holdings.
You
should read this information statement, including all annexes to this
information statement with the understanding that actual future results may be
materially different from what the parties expect. Neither the Company nor Ding
Neng Holdings assumes any obligation to update any forward-looking
statements.
RISK
FACTORS
You
should carefully consider the following risk factors, together with all of the
other information included in this information statement, before you decide
whether to vote or direct your vote to be cast to approve the Acquisition or the
other proposals.
If
the Company completes the Acquisition pursuant to the Share Exchange Agreement,
as amended, the resulting company will be subject to a number of risks. You
should carefully consider the risks described below and the other information
included in this information statement. Following the closing of the Share
Exchange Agreement, as amended, the market price of the Company’s
securities could decline due to any of these risks, in which case you could lose
all or part of your investment.
In
assessing these risks, you should also refer to the other information included
in this information statement, including the consolidated financial statements
and the accompanying notes. You should note that the Company will be a holding
company with substantial operations in the PRC. As a result, the Company will be
subject to legal and regulatory environments that differ in many respects from
those of the United States. The Company’s business, financial condition or
results of operations could be affected materially and adversely by any of the
risks discussed below.
Risks
Related to Ding Neng Holdings’ Business and Operations
Risks
Related to Ding Neng Holdings’ Overall Business
Ding
Neng Holdings has a limited operating history, which makes it difficult to
evaluate its financial position and future success.
Ding Neng
Holdings began generating revenue in 2006 and had limited business operations.
Accordingly, there is limited prior operating history by which to evaluate the
likelihood of success or its ability to exist as a going concern. Although Ding
Neng Holdings has been producing and selling biodiesel from its plant in
Zhangzhou, Fujian Province, China, its production and sales have not reached
full capacity and there is no assurance its production and sales capacity will
increase in the near future or at all.
Ding
Neng Holdings is a holding company and there are significant limitations on its
ability to receive distributions from its subsidiaries.
Ding Neng
Holdings conducts substantially all of its operations through subsidiaries and
through contractual arrangements with an affiliated variable interest entity
(“VIE”), and are dependent on dividends or other intercompany transfers of funds
from its subsidiaries and affiliated VIE to meet its obligations. Ding Neng
Holdings’ subsidiaries have not made significant distributions to it and may not
have funds legally available for dividends or distributions in the future. In
addition, Ding Neng Holdings may enter into credit or other agreements that
would contractually restrict its subsidiaries or affiliated VIE from paying
dividends or making distributions.
New
environmental laws, new interpretations of existing environmental laws,
increased governmental enforcement of environmental laws or other developments
could require Ding Neng Holdings to make additional significant expenditures.
Continued government and public emphasis on environmental issues can be expected
to result in increased future investments for environmental controls at Ding
Neng Bio-tech’s production facilities.
Ding Neng
Holdings is and will continue to be subject to extensive air, water and other
environmental regulations and will need to obtain a number of environmental
permits to construct and operate its plant. If for any reason, any of these
permits are not granted, construction costs for the plants may increase, or the
plants may not be constructed at all. If constructed, there may be
substantial regulatory restrictions and other compliance matters that would have
an effect on Ding Neng Bio-tech’s operations
.
Additionally, any
changes in environmental laws and regulations, both at the state and local
level, could require Ding Neng Holdings to invest or spend considerable
resources to comply with future environmental regulations. The expense of
compliance could be significant enough to reduce profits.
Environmental
laws and regulations applicable to Ding Neng Bio-tech’s operations now or in the
future, more vigorous enforcement policies and discovery of currently unknown
conditions may require substantial expenditures that could have a negative
impact on Ding Neng Holdings results of operations and financial condition. For
example, carbon dioxide is a byproduct of the biodiesel fuel manufacturing
process and may be released into the atmosphere. Emissions of carbon dioxide
resulting from the manufacturing process are not currently subject to applicable
permit requirements. If new laws or regulations are passed relating
to the production, disposal or emissions of carbon dioxide, Ding Neng Bio-tech
may be required to incur significant costs to comply with such new laws or
regulations.
Ding Neng
Bio-tech’s manufacturing operations and sales in China subject Ding Neng
Holdings to risks associated with domestic and foreign laws, policies and
economies. Ding Neng Bio-tech’s biodiesel manufacturing plant is located in
China and it may construct and operate other biodiesel plants in China in the
future. In 2009 and 2008, 100% of its biodiesel sales have been to customers in
China. Manufacturing operations are subject to inherent risks, all of which
could have a material adverse effect on its financial condition or results of
operations. Risks affecting its operations include:
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unexpected
changes in regulatory requirements;
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political
and economic instability;
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terrorism
and civil unrest;
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work
stoppages or strikes;
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difficulties
in staffing and managing operations;
and
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variations
in tariffs, quotas, taxes and other market
barriers;
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Ding
Neng Bio-tech’s production is entirely dependent on the operations of one
biodiesel production facility in Zhangzhou City. An operational disruption at
this facility halt all operations.
All of
Ding Neng Holdings’ revenues are, and in the near-term will continue to be,
derived from the sale of biodiesel produced at Ding Neng Bio-tech’s production
facility in Zhangzhou City. This facility may be subject to significant
interruption if it experiences a major accident or is damaged by severe weather
or other natural disasters. In addition, this facility may be subject to labor
disruptions and unscheduled downtime, or other operational hazards inherent in
Ding Neng Holdings’ industry, such as equipment failures, fires, explosions,
pipeline ruptures and transportation accidents. Some of these hazards may cause
severe damage to, or destruction of, property and equipment or environmental
damage, and may result in suspension of operations and the imposition of civil
or criminal penalties. Any such delay or disruption can be expected to harm Ding
Neng Holdings’ financial condition, results of operation and future growth
prospects.
Ding
Neng Bio-tech has not obtained formal land use rights certificates to the land
where its manufacturing facility is located, a building ownership certificate
for the facility, or the approval for the change in the use of land from
agricultural to industrial purposes, and the failure to have such certificates
and approvals could materially and adversely affect its right to use such
land.
Ding Neng
Bio-tech's manufacturing facility is located on a parcel of land with an area of
approximately 37,868 square meters in Shange Town, Pinghe County, Zhangzhou
City, Fujian Province. The land has been collectively-owned by Shange
Town and was designated for agricultural use. Although Mr. Nie, Ding
Neng Holders' chairman had entered into a Land Use Agreement with the local
government of Shange Town regarding the purchase of the land from the State for
the construction of the manufacturing facility and a majority of the purchase
price has been paid by Ding Neng Bio-tech, it is still in the process
of obtaining the relevant land use rights certificates, building ownership
certificates for the facility, and the approval to change the use of the land
from agricultural to industrial purposes.
A
certification jointly issued by the local government of Shange Town and the
Bureau of Land and Resources of Pinghe County dated July 17, 2007 confirms that
the review of Ding Neng Bio-tech’s application for such certificates and
approvals was in process. On May 26, 2010, the local government of Shange Town
issued a written statement clarifying that the land was assigned to Ding Neng
Bio-Tech for the construction of biodiesel production project and that the
related applications for the land use rights certificate and related approvals
were being reviewed. Another certification issued by the Bureau of Land and
Resources of Pinghe County dated October 14, 2010 also verifies that such
applications are currently being reviewed. Upon obtaining the relevant
certificates for these properties, Ding Neng Bio-tech will have the legal right
to occupy, lease, transfer and mortgage the property. However, there is no
guarantee Ding Neng Bio-tech will be able to obtain all of the certificates and
approvals it currently lacks, in which case its rights as owner or
occupier of the land and the facility may be adversely affected. As a result of
the absence of the formal certificates or approvals as described above, Ding
Neng Bio-tech may be subject to lawsuits or other actions by the government,
such as fines, or modifications to, or removal or confiscation of, some or all
of the buildings located on the property. Any such result can be expected to
have a material adverse effect on Ding Neng Bio-tech's financial condition and
results of operations.
Even
if Ding Neng Bio-tech were granted the land use rights as referenced
above, its business would suffer if it lost such land use
rights.
There is
no private ownership of land in China and all land ownership is held by the
government of China, its agencies and collectives. In the case of land used for
business purposes, land use rights can be obtained from the government for a
period up to 50 years, and are typically renewable. Land use rights can be
granted upon approval by the land administrative authorities of China (State
Land Administration Bureau) upon payment of the required land granting fee, the
entry into a land use agreement with a competent governmental authority and
certain other ministerial procedures. We cannot, however, give any assurance
that Ding Neng Bio-tech's land use rights, if granted, would be renewed in the
future. If the land use right certificates were not renewed, Ding Neng Bio-tech
could lose production facilities or employee accommodations that would be
difficult or even impossible to replace. Should it have to
relocate, its workforce may be unable or unwilling to work in the new
location and its business operations will be disrupted during the
relocation. The relocation or loss of facilities could materially harm sales or
increase Ding Neng Bio-tech's costs of production, which would negatively
impact its financial results and hinder future growth.
Gross margins are principally
dependent on the spread between feedstock prices and biodiesel prices.
If the cost of feedstock
increases and the cost of biodiesel does not similarly increase or if the cost
of biodiesel decreases and the cost of feedstock does not similarly decrease,
gross margins will decrease and Ding Neng Holdings’ results of operations could
be harmed.
Ding Neng
Holdings’ gross margins depend principally on the spread between feedstock and
biodiesel prices. This spread has fluctuated significantly in recent
periods.
From 2006
to the fall of 2008, prices for all varieties of feedstock increased to record
levels. The price of petroleum diesel and biodiesel increased at approximately a
similar pace. In the fall of 2008, the global economic downturn created
significant declines in prices for petroleum diesel and biodiesel. In 2009,
prices increased slowly. In general, higher feedstock prices produce lower
profit margins and, therefore, represent unfavorable market conditions. This is
especially true when market conditions do not allow Ding Neng Bio-tech to pass
along increased feedstock costs to its customers. The price of feedstock is
influenced by general economic, market and regulatory factors. These factors
include weather conditions, farmer planting decisions, government policies and
subsidies with respect to agriculture and international trade and global supply
and demand. The significance and relative impact of these factors on the price
of feedstock is difficult to predict. Factors such as severe weather or crop
disease could have an adverse impact on Ding Neng Bio-tech’s business. Any event
that tends to negatively impact the supply of Ding Neng Bio-tech’s chosen
feedstock or the demand for biodiesel will potentially harm its financial
condition and results of operation.
Consumer
acceptance or rejection of biodiesel will have a material impact on Ding Neng
Holdings’ future operations prospects.
The
market in China for biodiesel has only recently begun to develop and is rapidly
evolving. Therefore, widespread acceptance of Ding Neng Holdings’ biodiesel is
not assured. Its success depends upon market acceptance of biodiesel as an
addition, or an alternative, to petroleum diesel or other petroleum products.
Because this market is new, it is difficult to predict its potential size or
future growth rate. In addition, a long-term customer base has not been
adequately defined. Ding Neng Bio-tech’s success in generating revenue in this
emerging market will depend, among other things, on its ability to educate
potential customers and end-users about the practical benefits of
biodiesel.
Unanticipated
problems or delays with product quality or product performance could result in a
decrease in customers and revenue, unexpected expenses and loss of market
share.
Ding Neng
Holdings’ cash flow depends on its ability to timely and economically operate
its Zhangzhou biodiesel refinery. Refinery operations require significant
amounts of capital to procure and process feedstock before receiving payment for
finished biodiesel.
The
production of biodiesel is complex, and Ding Neng Bio-tech’s product must meet
stringent quality requirements. Concerns about fuel quality may impact its
ability to successfully market its biodiesel to a larger market. If its
biodiesel does not meet the industry quality standard, its credibility and the
market acceptance and sales of its biodiesel could be negatively affected. In
addition, actual or perceived problems with quality control in the industry
generally may lead to a lack of consumer confidence in biodiesel. Prolonged
problems may threaten the commercial viability of Ding Neng Bio-tech’s
refinery.
Ding
Neng Bio-tech’s business will suffer if it cannot maintain necessary permits or
licenses.
Ding Neng
Bio-tech’s operations require licenses, permits and in some cases renewals of
these licenses and permits from various governmental authorities. Ding Neng
Bio-tech’s ability to sustain, or renew such licenses and permits on acceptable,
commercially viable terms are subject to change as, among other things, the
regulations and policies of applicable governmental authorities may change. Ding
Neng Bio-tech’s inability to extend a license or a loss of any of these licenses
or permits may have a material adverse effect on its financial condition and
future operating prospects.
Ding
Neng Bio-tech primarily sells its biodiesel through distributors and if its
relationships with one or more of those distributors were to end its operating
results would be harmed.
Ding Neng
Bio-tech markets and distributes a substantial portion of its biodiesel through
independent distributors. Ding Neng Bio-tech’s operating results and financial
condition could be significantly disrupted by the loss of one or more of its
current distributors, by pricing discounts that it may offer to reward
significant customers not procured by the distributor, order cancellations or
the failure of its distributors to successfully sell its products.
Ding
Neng Bio-tech’s operations are subject to hazards that may cause personal injury
or property damage, thereby subjecting it to liabilities and possible losses
that may not be covered by insurance and which could have a material adverse
effect on its results of operations and financial condition.
Ding Neng
Bio-Tech’s workers are subject to the hazards associated with producing
biodiesel fuel. Operating hazards can cause personal injury and loss
of life, damage to, or destruction of, property, plant and equipment and
environmental damage. Hazards and risks, such as fires, natural
disasters, explosions and abnormal pressures and blowouts, associated with
producing and transporting biodiesel fuel also may result in personal injury and
other claims. In the event Ding Neng Bio-tech does not have adequate
insurance coverage, its financial condition and future operating prospects may
be harmed.
Financial
instability in the Chinese financial markets could materially and adversely
affect results of operations and financial condition.
The
Chinese financial market and the Chinese economy are influenced by economic and
market conditions in other countries, particularly in other Asian emerging
market countries and the United States. Financial turmoil in Asia, Russia and
elsewhere in the world in recent years has affected the Chinese economy.
Although economic conditions are different in each country, investors’ reactions
to developments in one country can have adverse effects on the securities of
companies operating in other countries, including China. A loss in investor
confidence in the financial systems of other emerging markets may cause
increased volatility in Chinese financial markets and, indirectly, in the
Chinese economy in general. Financial disruptions could harm Ding Neng Holdings’
stock price, results of operations and financial condition.
Natural
calamities could have a negative impact on the Chinese and other economies and
harm Ding Neng Bio-tech’s business.
China has
experienced natural calamities such as earthquakes, floods, droughts and a
tsunami in recent years. The extent and severity of these natural disasters
determines their impact on the economies in the local communities that
experience these calamities. Ding Neng Bio-tech’s plant is located very near the
ocean and prolonged spells of abnormal rainfall and other natural calamities
could subject its facility to flooding or other damage which would have a
negative effect on Ding Neng Bio-tech’s operations and its business. In
addition, natural disasters could have an adverse impact on the economies in the
geographic regions in which it operates, which could adversely affect its
operating and growth prospects.
The
biodiesel production and marketing industry is extremely competitive. Many of
Ding Neng Bio-tech’s competitors have greater financial and other resources and
one or more of these competitors could use such resources to gain market share
at Ding Neng Bio-tech’s expense.
The
primary type of fuel used in China is petroleum diesel. Ding Neng Bio-tech
competes with existing oil companies as well as other biodiesel production
companies. They currently compete for the sale of its products primarily on a
regional basis within the Fujian Province. Ding Neng Bio-tech’s primary
competitors in these areas are Gushan Environmental Energy Ltd. and Zhejiang
Eastriver Energy Technology Ltd. These competitors have substantially greater
production, financial, personnel and marketing resources. As a result, its
competitors are able to compete more aggressively and sustain that competition
over a longer period of time. Their lack of resources relative to these
competitors may cause them to fail to anticipate or respond adequately to new
developments and other competitive pressures. This failure could reduce their
competitiveness and cause a decline in their market share, sales and
profitability.
Ding Neng
Bio-tech also faces competition from other producers of biodiesel with respect
to the procurement of feedstock. Such competition could intensify, thus driving
up the cost of feedstock and reducing their profit margin. Competition will
likely increase as the commodities market prices of hydrocarbon-based energy,
including petroleum and biodiesel, rise as they have in recent years.
Additionally, new companies are constantly entering the market, thus increasing
competition, although barriers to entry are relatively high.
These
companies may have greater success in the recruitment and retention of qualified
employees, as well as in conducting their own refining and fuel marketing
operations, and may have greater access to feedstock, market presence, economies
of scale, financial resources and engineering, technical and marketing
capabilities, which may give them a competitive advantage. In addition, actual
or potential competitors may be strengthened through the Acquisition of
additional assets and interests. If Ding Neng Bio-tech is unable to compete
effectively or adequately respond to competitive pressures, this may materially
adversely affect Ding Neng Holdings’ results of operation and financial
condition.
Growth
may impose a significant burden on Ding Neng Bio-tech’s administrative and
operational resources which, if not effectively managed, could impair its
growth.
Ding
Neng’s strategy envisions a period of rapid growth that may impose a significant
burden on its administrative and operational resources. The growth of its
business will require significant investments of capital and management’s close
attention. Ding Neng Bio-tech’s ability to effectively manage its growth will
require it to substantially expand the capabilities of its administrative and
operational resources and to attract, train, manage and retain qualified
management, technicians and other personnel. Ding Neng Bio-tech’s failure to
successfully manage its growth could result in its sales not increasing
commensurately with capital investments. If Ding Neng Bio-tech is unable to
successfully manage its growth, the Company may be unable to achieve its growth
goals.
Ding
Neng Bio-tech may be unable to protect its intellectual property, which could
negatively affect its ability to compete.
Ding Neng
Bio-tech relies on a combination of trademark, trade name, confidentiality
agreements, and other contractual restrictions on disclosure to protect its
intellectual property rights. Ding Neng Bio-tech also enters into
confidentiality agreements with its employees, consultants, and corporate
partners, and controls access to and distribution of its confidential
information. These measures may not preclude the disclosure of its confidential
or proprietary information. Despite efforts to protect proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use Ding Neng
Bio-tech’s proprietary information. Monitoring unauthorized use of its
confidential information is difficult, and Ding Neng Bio-tech cannot be certain
that the steps it takes to prevent unauthorized use of its confidential
information, particularly in foreign countries where the laws may not protect
proprietary rights as fully as in the U.S., will be effective.
Ding
Neng Bio-tech will be required to hire and retain skilled technical and
managerial personnel.
Personnel
qualified to operate and manage biodiesel plants are in demand. Ding Neng
Bio-tech’s success depends in large part on its ability to attract, train,
motivate and retain qualified management and highly-skilled employees,
particularly managerial, technical, sales and marketing personnel, technicians,
and other critical personnel. Any failure to attract and retain trained
managerial and technical personnel may have a negative impact on the operations
of Ding Neng Bio-tech, which would have a negative impact on revenues. There can
be no assurance it will be able to attract and retain skilled
persons.
Ding
Neng Bio-tech is dependent upon its officers for management and direction and
the loss of any of these persons could adversely affect its operations and
results.
Ding Neng
Bio-tech is dependent upon its officers for implementation of its proposed
expansion strategy and execution of its business plan. The loss of any of its
officers could have a material adverse effect upon its results of operations and
financial position. Ding Neng Bio-tech does not maintain “key person” life
insurance for any of its officers. The loss of any of its officers could delay
or prevent the achievement of its business objectives.
Ding
Neng Holdings’ lack of business diversification could result in the devaluation
of its securities if it does not generate revenue from its primary products or
such revenues decrease.
Ding Neng
Holdings’ current business consists solely of the production and sales of
biodiesel in China. Currently, sales of biodiesel products account for 100% of
Ding Neng Holdings’ revenues. Its lack of business diversification
could cause you to lose all or some of your investment, since Ding Neng Holdings
does not have any other lines of business or alternative revenue
sources.
Failure
to fully comply with PRC labor laws, including laws relating to social
insurance, may expose Ding Neng Bio-tech to potential liability and
increased costs.
Companies
operating in China must comply with a variety of labor laws, including certain
pension, health insurance, unemployment insurance and other welfare-oriented
payment obligations. Ding Neng Bio-tech is currently paying
social insurance for its 43 full-time employees. Ding Neng Bio-tech
has also purchased non-compulsory accident insurance for its workers who
work on the production line.
Ding Neng Bio-tech has not
paid social insurance for 25 of its full-time employees whose personal
identification files cannot be transferred to Ding Neng Bio-tech since they are
not registered residents in Zhangzhou, Fujian Province. Ding Neng Bio-tech also
has 16 of its full-time employees who voluntarily elected, in writing, not
to obtain social insurance through Ding Neng Bio-tech. If the PRC
regulatory authorities take the view that Ding Neng Bio-tech is required to
pay social insurance for all of its full-time employees, its failure
to make previous payments may be in violation of applicable PRC labor laws and
we cannot assure you that PRC governmental authorities will not impose penalties
on Ding Neng Bio-tech for failure to comply. In addition, in the event
that any current or former employee files a complaint with the PRC government,
Ding Neng Bio-tech may be required to make up the social insurance payment
obligations as well as paying administrative fines. The total cost of
these payments and any related fines or penalties could have a material adverse
effect on Ding Neng Bio-tech's working capital.
In
addition, the new PRC Labor Contract Law took effect January 1, 2008 and governs
standard terms and conditions for employment, including termination and lay-off
rights, contract requirements, compensation levels and consultation with labor
unions, among other topics. In addition, the law limits
non-competition agreements with senior management and other employees who have
access to confidential information to two years and imposes restrictions or
geographical limits. This new labor contract law will
increase Ding Neng Bio-tech's labor costs, which could adversely
impact its results of operations.
Risks
Related to the VIE Agreements
The
PRC government may determine that the VIE Agreements are not in compliance with
applicable PRC laws, rules and regulations.
Ding Neng
Holdings manages and operates the business of Ding Neng Bio-tech through Fuhua
pursuant to the rights it holds under the VIE Agreements. Almost all economic
benefits and risks arising from Ding Neng Bio-tech’s operations are transferred
to Ding Neng Holdings under these agreements.
There are
risks involved with the operation of Ding Neng Bio-tech’s business in reliance
on the VIE Agreements, including the risk that the VIE Agreements may be
determined by PRC regulators or courts to be unenforceable. If the
VIE Agreements were for any reason determined to be in breach of any existing or
future PRC laws or regulations, the relevant regulatory authorities would have
broad discretion in dealing with such breach, including:
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imposing
economic penalties;
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discontinuing
or restricting the operations of Fuhua or Ding Neng
Bio-tech;
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imposing
conditions or requirements in respect of the VIE Agreements with which
Ding Neng Bio-tech may not be able to
comply;
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requiring
Ding Neng Holdings to restructure the relevant ownership structure or
operations;
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•
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taking
other regulatory or enforcement actions that could adversely affect its
business; and
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revoking
the business licenses and/or the licenses or certificates of Ding Neng
Bio-tech and/or voiding the VIE
Agreements.
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Any of
these actions could adversely affect Ding Neng Holdings’ ability to manage,
operate and gain the financial benefits of Ding Neng Bio-tech, which represents
its sole operations, which would have a material adverse impact on its business,
financial condition and results of operations.
Ding
Neng Holdings’ ability to manage and operate Ding Neng Bio-tech under the VIE
Agreements may not be as effective as direct ownership.
Following
the Acquisition, Ding Neng Holdings will conduct its biodiesel manufacturing,
processing and sales businesses in the PRC through Ding Neng Bio-tech and
generate virtually all of its revenues through the VIE
Agreements. Ding Neng Holdings’ plans for future growth are based
substantially on growing the operations of Ding Neng
Bio-tech. However, the VIE Agreements may not be as effective in
providing Ding Neng Holdings with control over Ding Neng Bio-tech as direct
ownership
.
Under the current
VIE arrangements, as a legal matter, if Ding Neng Bio-tech fails to perform its
obligations under these contractual arrangements, it may have to (i) incur
substantial costs and resources to enforce such arrangements, and (ii) rely on
legal remedies under PRC law, which it cannot be sure would be
effective. Therefore, if Ding Neng Holdings is unable to effectively
control Ding Neng Bio-tech, it may have an adverse effect on its ability to
achieve its business objectives and grow its revenues.
Risks
Related to Doing Business in the PRC
The
Chinese government exerts substantial influence over the manner in which Ding
Neng Bio-tech must conduct its business activities.
Ding Neng
Bio-tech is dependent on its relationship with the local government in the
province in which it operates. The Chinese government has exercised
and continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Ding Neng
Bio-tech’s ability to operate in China may be harmed by changes in its laws and
regulations, including those relating to taxation, environmental regulations,
land use rights, property and other matters. The central or local
governments of in the PRC jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require additional
expenditures and efforts on Ding Neng Bio-tech’s part to ensure its compliance
with such regulations or interpretations. Accordingly, government
actions in the future, including any decision not to continue to support recent
economic reforms and to return to a more centrally planned economy or regional
or local variations in the implementation of economic policies, could have a
significant effect on economic conditions in China or particular regions
thereof, and could require Ding Neng Holdings to divest itself of any interest
it then holds in Chinese properties.
Future
inflation in China may inhibit Ding Neng Bio-tech’s ability to conduct business
in China. In recent years, the Chinese economy has experienced periods of rapid
expansion and high rates of inflation. Rapid economic growth can lead
to growth in the money supply and rising inflation. If prices for
Ding Neng Bio-tech’s products rise at a rate that is insufficient to compensate
for the rise in the costs of supplies, it may have an adverse effect on
profitability. These factors have led to the adoption by Chinese
government, from time to time, of various corrective measures designed to
restrict the availability of credit or regulate growth and contain
inflation. High inflation may in the future cause Chinese government
to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for biodiesel
products.
Ding
Neng Bio-tech’s operations and assets in China are subject to significant
political and economic uncertainties and Ding Neng Holdings may lose all of its
assets and operations if the Chinese government alters its policies to further
restrict foreign participation in business operating in the PRC.
Changes
in PRC laws and regulations, or their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on
Ding Neng Bio-tech’s business, results of operations and financial
condition. Under its current leadership, the Chinese government has
been pursuing economic reform policies that encourage private economic
activities and greater economic decentralization. There is no
assurance, however, that the Chinese government will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice.
Ding Neng Holdings may
lose all of its assets and operations if the Chinese government alters its
policies to further restrict foreign participation in business operating in the
PRC.
Ding
Neng Holdings derives all of its sales in China and a slowdown or other adverse
developments in the PRC economy may materially and adversely affect Ding Neng
Bio-tech’s customers, demand for its products and its business.
All of
Ding Neng Bio-tech’s sales are generated in China and it anticipates that sales
of its biodiesel fuel in China will continue to represent all of its total sales
in the near future. Although the PRC economy has grown significantly
in recent years, no assurances can be given that such growth will
continue. The industry in which Ding Neng Bio-tech is involved in the
PRC is relatively new and growing, but Ding Neng Bio-tech does not know how
sensitive it is to a slowdown in economic growth or other adverse changes in the
PRC economy which may affect demand for biodiesel products. In
addition, the Chinese government also exercises significant control over Chinese
economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts
by the Chinese government to slow the pace of growth of the Chinese economy
could result in reduced demand for biodiesel products. A slowdown in
overall economic growth, an economic downturn or recession or other adverse
economic developments in the PRC may materially reduce the demand for biodiesel
products and materially and adversely affect the business, results of operations
and future operating prospects of Ding Neng Bio-tech.
Currency
fluctuations and restrictions on currency exchange may adversely affect Ding
Neng Bio-tech’s business, including limiting the ability to convert Chinese
Renminbi into foreign currencies and, if Chinese Renminbi were to decline in
value, reducing Ding Neng Holdings’ financial results in U.S. dollar
terms.
Ding Neng
Holdings’ reporting currency is the U.S. dollar and Ding Neng Bio-tech’s
operations in China use its local currency as its functional
currency. Substantially all of Ding Neng Holdings’ revenue and
expenses are in the Chinese currency, the Renminbi, or RMB. Ding Neng
Holdings is subject to the effects of exchange rate fluctuations with respect to
any of these currencies. For example, the value of the Renminbi
depends to a large extent on Chinese government policies and China’s domestic
and international economic and political developments, as well as supply and
demand in the local market. Since 1994, the official exchange rate
for the conversion of the Renminbi to the U.S. dollar had generally been stable
and the Renminbi had appreciated slightly against the U.S. dollar. In
July 2005, the Chinese government changed its policy of pegging the value of the
Renminbi to the U.S. dollar. Under this policy, which was halted in
2008 due to the worldwide financial crisis, the Renminbi was permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. In June 2010, the Chinese government announced its
intention to again allow the Renminbi to fluctuate within the 2005
parameters. It is possible that the Chinese government could adopt an
even more flexible currency policy, which could result in more significant
fluctuation of Renminbi against the U.S. dollar, or it could adopt a more
restrictive policy. Thus, the Renminbi may not be stable against the
U.S. dollar or any other foreign currency.
Ding Neng
Holdings’ financial statements are translated into U.S. dollars at the average
exchange rates in each applicable period. To the extent the U.S.
dollar strengthens against the RMB, the translation of RMB-denominated
transactions results in reduced revenue, operating expenses and net income for
Ding Neng Bio-tech’s operations. Similarly, to the extent the U.S.
dollar weakens against the RMB, the translation of RMB-denominated transactions
results in increased revenue, operating expenses and net income. Ding
Neng Holdings is also exposed to foreign exchange rate fluctuations as it
converts the financial statements of its foreign consolidated subsidiaries into
U.S. dollars in consolidation. If there is a change in RMB exchange
rates, such conversion into U.S. dollars will lead to a translation gain or loss
which is recorded as a component of other comprehensive income. Ding
Neng Holdings has not entered into agreements or purchased instruments to hedge
its exchange rate risks, although it may do so in the future. The
availability and effectiveness of any hedging transaction may be limited and
Ding Neng Holdings may not be able to hedge its exchange rate
risks.
The
State Administration of Foreign Exchange (“SAFE”) restrictions on currency
exchange may limit Ding Neng Holdings’ ability to receive and use its funds
effectively and to pay dividends.
All of
Ding Neng Holdings’ sales revenue and expenses are denominated in the Chinese
currency, Renminbi. Under PRC law, the Renminbi is currently
convertible under the “current account,” which includes dividends and trade and
service-related foreign exchange transactions, but not under the “capital
account,” which includes foreign direct investment and
loans. Currently, Ding Neng Bio-tech may purchase foreign currencies
for settlement of current account transactions, including distributions in the
form of consulting fees and payments of dividends to Ding Neng Holdings, without
the approval of SAFE, by complying with certain procedural
requirements. However, the relevant PRC government authorities may
limit or eliminate Ding Neng Bio-tech’s ability to purchase foreign currencies
in the future.
All of
Ding Neng Holdings’ income is derived from the consulting fees it receives from
Ding Neng Bio-tech through the VIE Agreements. SAFE restrictions may
delay the payment of dividends, since Ding Neng Bio-tech has to comply with
certain procedural requirement and it may experience difficulties in completing
the administrative procedures necessary to obtain and remit foreign currency for
the distribution of the consulting fees or payment of dividends from the profits
of Fuhua.
Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including
SAFE. In particular, if Ding Neng Bio-tech borrows foreign currency
through loans from Ding Neng Holdings or other foreign lenders, these loans must
be registered with SAFE, and if Ding Neng Bio-tech is financed by means of
additional capital contributions, these capital contributions must be approved
by certain government authorities, including the Ministry of Commerce, or their
respective local counterparts. These limitations could affect Ding
Neng Bio-tech’s ability to obtain foreign exchange through debt or equity
financing.
The PRC
government also may at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange
control system prevents Ding Neng Holdings from obtaining foreign currency, it
may be unable to pay dividends or meet obligations that may be incurred in the
future that require payment in foreign currency.
The
SAFE restrictions on the use of offshore holding companies in mergers and
acquisitions in China may create regulatory uncertainties that could restrict or
limit Ding Neng Bio-tech’s ability to operate.
In
November 2005, SAFE issued a public notice, known as Circular 75, concerning
foreign exchange registrations that are required in order to use of offshore
holding companies in mergers and acquisitions in China. The public
notice provides that if an offshore company controlled by PRC residents intends
to acquire a PRC company, such acquisition will be subject to registration with
the relevant foreign exchange authorities. The public notice also
suggested that registration with the relevant foreign exchange authorities is
required for any sale or transfer by the PRC residents of shares in an offshore
holding company that owns an onshore company. PRC residents must each
submit a registration form to the local SAFE branch with respect to their
ownership interests in the offshore company, and must also file an amendment to
such registration if the offshore company experiences material events, such as
changes in the share capital, share transfer, mergers and acquisitions, spin-off
transactions or use of assets in China to guarantee offshore
obligations.
Additionally, in accordance with
The
Provisions on the Takeover of Domestic Enterprises by Foreign
Investors
(No. 10 [2006])
issued by six ministries and commissions of the PRC State Council, where a
domestic company, enterprise or individual intends to take over its domestic
affiliated company in the name of a company which it lawfully established or
controls, it shall be subject to the examination and approval of the Ministry of
Commerce. The parties concerned shall not avoid the aforesaid requirements
by making investments within
China
through the foreign-funded enterprise,
or by other means
Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by, among other things,: (i)
purporting to cover the establishment or acquisition of control by PRC residents
of offshore entities which merely acquire “control” over domestic companies or
assets, even in the absence of legal ownership; (ii) adding requirements
relating to the source of the PRC resident’s funds used to establish or acquire
the offshore entity and (iii) covering the use of existing offshore entities for
offshore financings. The PRC regulatory authorities may take the view
that Ding Neng Holdings’ acquisition of indirect ownership and controlling
interest in Ding Neng Bio-tech through VIE arrangements shall be subject to SAFE
approval and registration. Any adverse action taken by PRC regulatory
authorities could significantly and negatively impact Ding Neng Bio-tech’s
operations.
Based on Ding Neng
Holdings' understanding, such provisions do not apply to the contractual
arrangement between Fuhua and Ding Neng Bio-Tech. However, a
competent government authority may make further amendments
or revisions to such rules which may require approval for such
arrangements in the future.
Because
all of Ding Neng Holdings’ assets are located outside of the United States and
half of its directors, including its Chairman, and the majority of its officers
reside outside of the United States, it may be difficult for you to enforce your
rights against Ding Neng Holdings based on United States federal securities laws
or against these persons in the United States or to enforce judgments of United
States courts against Ding Neng Holdings or the officers or directors of Ding
Neng Holdings in the PRC.
The
Chairman of the Board and principal executive officer of Ding Neng Holdings, Mr.
Nie, resides in China. In addition, another of its directors and a
majority of its officers are also located in China. Furthermore, the
operating subsidiary, Ding Neng Bio-tech, is located in the PRC and all of its
assets are located outside of the United States. China does not have
a treaty with United States providing for the reciprocal recognition and
enforcement of judgments of courts. It may therefore be difficult for
investors in the United States to enforce their legal rights based on the civil
liability provisions of the United States federal securities laws against Ding
Neng Holdings in the courts of either the United States or the PRC and, even if
civil judgments are obtained in courts of the United States, to enforce such
judgments in the PRC courts. Further, it is unclear if extradition
treaties now in effect between the United States and the PRC would permit
effective enforcement against Ding Neng Holdings or its officers and directors
of criminal penalties, under the United States federal securities laws or
otherwise.
Ding
Neng Holdings may have limited legal recourse under PRC laws if disputes arise
under contracts with third parties.
The
Chinese government has enacted some laws and regulations dealing with matters
such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, their experience in implementing,
interpreting and enforcing these laws and regulations is limited, and Ding Neng
Holdings’ ability to enforce commercial claims or to resolve commercial disputes
is unpredictable. If Ding Neng Bio-tech’s new business ventures are
unsuccessful, or other adverse circumstances arise from these transactions, it
faces the risk that the parties to these ventures may seek ways to terminate the
transactions, or, may hinder or prevent Ding Neng Bio-tech from accessing
important information regarding the financial and business operations of these
acquired companies. The resolution of these matters may be subject to
the exercise of considerable discretion by agencies of the Chinese government,
and forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights Ding Neng Bio-tech may have to
specific performance, or to seek an injunction under PRC laws, in either of
these cases, are severely limited, and without a means of recourse by virtue of
the Chinese legal system, Ding Neng Bio-tech may be unable to prevent these
situations from occurring. The occurrence of any such events could
have a material adverse effect on Ding Neng Holdings’ business, financial
condition and results of operations. Although legislation in China
has significantly improved the protection afforded to various forms of foreign
investment and contractual arrangements in China, these laws, regulations and
legal requirements are relatively new and their interpretation and enforcement
involve uncertainties, which could limit the legal protection available to Ding
Neng Bio-tech and foreign investors. The inability to enforce or
obtain a remedy under any of Ding Neng Bio-tech’s future agreements could result
in a significant loss of business, business opportunities or capital and could
have a material adverse impact on Ding Neng Holdings’ operations and future
business prospects.
If
Ding Neng Holdings makes equity compensation grants to persons who are PRC
citizens, they may be required to register with SAFE. Ding Neng
Bio-tech may also face regulatory uncertainties that could restrict its ability
to adopt equity compensation plans for its directors and employees and other
parties under PRC laws.
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is
not clear whether Circular 78 covers all forms of equity compensation plans or
only those which provide for the granting of stock options. For any plans which
are so covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the
plan.
Ding Neng
Holdings may adopt an equity incentive plan and make numerous stock option
grants under the plan to its officers, directors and employees, some of whom are
PRC citizens and may be required to register with SAFE. If it is
determined that any of Ding Neng Holdings’ equity compensation plans are subject
to Circular 78, failure to comply with such provisions may subject it and
participants of its equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent Ding Neng Holdings from being able to grant equity
compensation to PRC employees. In that case, Ding Neng Holdings’ ability to
compensate its and Ding Neng Bio-tech’s employees and directors through equity
compensation would be hindered and business operations may be adversely
affected.
Due
to various restrictions under PRC laws on the distribution of dividends by PRC
operating subsidiaries and VIE affiliates, Ding Neng Holdings may not be able to
pay dividends to its stockholders.
The
Wholly-Foreign Owned Enterprise Law (1986), as amended and the Wholly-Foreign
Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law
of the PRC (2006) contain the principal regulations governing dividend
distributions by wholly foreign owned enterprises. Under these regulations,
wholly foreign owned enterprises, such as Fuhua, may pay dividends only out of
their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. Additionally, Fuhua is required to set aside a
certain amount of their accumulated profits each year, if any, to fund certain
reserve funds. These reserves are not distributable as cash dividends
except in the event of liquidation and cannot be used for working capital
purposes.
Furthermore,
if the consolidated subsidiaries and VIE affiliate of Ding Neng Holdings in
China incur debt on their own in the future, the instruments governing the debt
may restrict its ability to pay dividends or make other payments. If Ding Neng
Holdings or its consolidated subsidiaries and VIE affiliate are unable to
receive all of the revenues from operations due to these contractual or dividend
arrangements, Ding Neng Holdings may be unable to pay
dividends.
Ding
Neng Holdings may have difficulty establishing adequate management, governance,
legal and financial controls in the PRC.
The PRC
historically has been deficient in western style management, governance and
financial reporting concepts and practices, as well as in modern banking, and
other control systems. Ding Neng Holdings’ current management has
little experience with western style management, governance and financial
reporting concepts and practices, and it may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the
PRC. As a result of these factors, and especially given that Ding
Neng Holdings expects to be a publicly listed company in the U.S. and subject to
regulation as such, it may experience difficulty in establishing management,
governance legal and financial controls, collecting financial data and preparing
financial statements, books of account and corporate records and instituting
business practices that meet western standards. Ding Neng Holdings
may have difficulty establishing adequate management, governance, legal and
financial controls in the PRC. Therefore, it may, in turn, experience
difficulties in implementing and maintaining adequate internal controls as
required under Section 404 of the Sarbanes-Oxley Act of 2002 and other
applicable laws, rules and regulations. This may result in
significant deficiencies or material weaknesses in its internal controls which
could impact the reliability of its financial statements and prevent it from
complying with SEC rules and regulations and the requirements of the
Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack
of compliance could have a materially adverse effect on Ding Neng Holdings’
business and the public announcement of such deficiencies could adversely impact
its stock price.
Risks
Relating to the Acquisition
Upon
completion of the Acquisition, voting control by Ding Neng Holdings Shareholders
may limit your ability to influence the outcome of director elections and other
matters requiring shareholder approval.
Upon
consummation of the Acquisition, the Ding Neng Holdings Shareholders will own
90% of the common stock of the Company. These Ding Neng Holdings Shareholders
will be able to control substantially all matters requiring approval by the
Company’s stockholders, including the election of a majority of the Company’s
directors and the approval of other business transactions. This concentration of
ownership could have the effect of delaying or preventing a future change in
control of the Company or discouraging a potential acquirer from attempting to
obtain control of the Company, which in turn could have a material adverse
effect on the market price of the Common Stock or prevent the Company’s
stockholders from realizing a premium over the market price for their common
stock.
Because
the Company does not intend to pay dividends, stockholders will benefit from an
investment in the Common Stock only if those shares appreciate in
value.
The
Company has never declared or paid any cash dividends on the shares of its
common stock. Upon completion of the Acquisition, the Company currently intends
to retain all future earnings, if any, for use in the operations and expansion
of the business. As a result, the Company does not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the
declaration and payment of cash dividends will be at the discretion of the Board
and will depend on factors its board of directors deems relevant, including
among others, the Company’s results of operations, financial condition and cash
requirements, business prospects, and the terms of the Company’s credit
facilities, if any, and any other financing arrangements. Accordingly,
realization of a gain on stockholders’ investments will depend on the
appreciation of the price of the Common Stock, and there is no guarantee that
the Common Stock will appreciate in value.
The
Board approved the Acquisition without obtaining a fairness
opinion.
The
Company did not obtain a fairness opinion with respect to the Acquisition of
Ding Neng Holdings. If the Board erred in concluding that the Share Exchange
Agreement, as amended, is in the best interest of its stockholders, then
its stockholders could suffer adverse consequences such as a decline in the
value of their shares following the consummation of the transaction. In
addition, at a minimum, any litigation over the board’s exercise of its
fiduciary duties would divert management’s time and attention from completing
the transactions described herein and would likely also involve the expenditure
of substantial amounts for legal fees.
Ding
Neng Holdings may have difficulty establishing adequate management, legal and
financial controls in the PRC.
Most PRC
companies historically have been less focused on establishing Western style
management and financial reporting concepts and practices, as well as modern
banking, computer and other internal control systems, than companies in the U.S.
and certain other Western countries. Ding Neng Holdings may have difficulty in
hiring and retaining a sufficient number of qualified internal control employees
to work in the PRC. As a result of these factors, Ding Neng Holdings may
experience difficulty in establishing management, legal and financial controls,
collecting financial data, preparing financial statements, books of account and
corporate records, and instituting business practices that meet Western
standards.
Section 404
of the Sarbanes-Oxley Act of 2002 will require the Company to document and test
its internal controls over financial reporting in future periods. Any delays or
difficulty in satisfying these requirements could adversely effect its future
results of operations and The Company’s stock price.
Section 404
of the Sarbanes-Oxley Act of 2002 will require the Company to document and test
the effectiveness of Ding Neng Holdings’ internal control over financial
reporting in accordance with an established internal control framework and to
report on its conclusion as to the effectiveness of such internal controls. It
may cost the Company more than it expects to comply with these control and
procedure-related requirements.
The
Company may discover in the future areas of its internal control that need
improvement, particularly with respect to Ding Neng Holdings Group or other
businesses that it may acquire. The Company cannot be certain that any remedial
measures it takes will provide it with adequate internal control over its
financial processes and reporting in the future. Any failure to implement
required new or improved controls, or difficulties encountered in their
implementation could harm the Company’s operating results or cause it to fail to
meet its reporting obligations. If the Company is unable to conclude that it has
effective internal control over financial reporting, or if its independent
auditors are unable to provide it with an unqualified report regarding the
effectiveness of its internal control over financial reporting in future periods
as required by Section 404, investors could lose confidence in the
reliability of its financial statements, which could result in a decrease in the
value of the Common Stock. In addition, failure to comply with Section 404
could potentially subject the Company to sanctions or investigations by the SEC
or other regulatory authorities.
Risks
Related to Our Common Stock
We
may experience volatility in our stock price, which could negatively
affect an investment in our Common Stock, and an investor may not be
able to resell our shares.
The
market price of our Common Stock may fluctuate significantly in response to a
number of factors, some of which are beyond our control, including: quarterly
variations in operating results; changes in financial estimates by securities
analysts; changes in market valuations of other similar companies; announcements
by us or our competitors of new products or of significant technical
innovations, contracts, acquisitions, strategic partnerships or joint ventures;
additions or departures of key personnel; any deviations in net sales or in
losses from levels expected by securities analysts; and future sales of common
stock. In addition, the stock market has recently experienced extreme
volatility that has often been unrelated to the performance of particular
companies. These market fluctuations may cause our stock price to fall
regardless of our financial performance.
Because
our securities trade on the Pink Sheets, an investor’s ability to
sell our shares in the secondary market may be limited.
Based of
the Company's current status as a “public shell” company without any business
operations, NASDAQ has suspended our securities from trading thereon effective
November 24, 2010 and to subsequently be formally delisted approximately 45 days
thereafter. Since November 24, 2010, our Common Stock has been traded
over-the-counter on the “Pink Sheets” under the symbol “CHIO.PK.” Broker-dealers
often decline to trade in Pink Sheet stocks given that the market for such
securities is often limited, the stocks are more volatile, and the risk to
investors is greater. Consequently, the opportunity to sell our Common Stock may
be limited. These factors could result in lower prices and larger spreads in the
bid and ask prices for shares of our Common Stock as well as lower trading
volume than would occur if our Common Stock traded on a national securities
exchange, such as NASDAQ. Accordingly, investors must be able to bear the
financial risk of losing their entire investment in our Common
Stock.
Because
our shares are deemed “penny stocks,” an investor may have difficulty
selling them in the secondary trading market.
The
Securities and Exchange Commission has adopted regulations which generally
define a “penny stock” to be any equity security that has a market price (as
therein defined) less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. Additionally, if the equity
security is not registered or authorized on a national securities exchange that
makes certain reports available, the equity security may also constitute a
“penny stock.” As our Common Stock falls within the definition of penny stock,
these regulations require the delivery by the broker-dealer, prior to any
transaction involving our Common Stock, of a risk disclosure schedule explaining
the penny stock market and the risks associated with it. The broker-dealer also
must provide the customer with bid and offer quotations for the penny stock, the
compensation of the broker-dealer and any salesperson in the transaction, and
monthly account statements indicating the market value of each penny stock held
in the customer’s account. In addition, the penny stock rules require that,
prior to a transaction in a penny stock not otherwise exempt from those rules,
the broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the trading activity in the secondary market for our Common Stock.
The ability of broker-dealers to sell our Common Stock and the ability of
shareholders to sell our Common Stock in the secondary market would be limited.
As a result, the market liquidity for our Common Stock would be severely and
adversely affected.
DETAILS
OF THE ACQUISITION
General
Description of the Acquisition
The
following discussion of the principal terms of the Share Exchange Agreement, as
amended, is subject to, and is qualified in its entirety by reference to,
the Share Exchange Agreement, as amended. A copy of the Share Exchange
Agreement, as amended, is attached as
Annexes A and B
to this
Information Statement and is incorporated by reference into this Information
Statement.
The Share
Exchange Agreement, as amended, provides for an acquisition transaction in
which the Company will acquire from the Ding Neng Holdings Shareholders 100% of
Ding Neng Holdings’ outstanding capital stock in exchange for shares of Common
Stock representing 90% of the Common Stock issued and outstanding immediately
following the closing of the Acquisition. Ding Neng Holdings is a
holding company that owns 100% of DBT, which owns 100% of Fuhua, which has,
through various contractual agreements, management control and the rights to the
profits of Ding Neng Bio-tech as a variable interest entity of Fuhua, which
engages in the production, refinement and distribution of bio-diesel fuel in
southern China.
Background
of the Acquisition
The terms
of the Acquisition are the result of arms-length negotiations between
representatives of the Company and Ding Neng Holdings. The following
is a discussion of the background of these negotiations, the Acquisition and
related transactions.
In July
2010, Mr. Karl Brenza from Maxim Group LLP (“Maxim”) reviewed the idea of
merging Ding Neng Holdings into a nationally listed company on a U.S. exchange
with Mr. Shan Huang of Wealth Index LLC, the 100% shareholder of Ding Neng
Holdings. Mr. Huang and Maxim have had a relationship since early 2010
pertaining to certain portfolio investments of Wealth Index.
In August
2010, Maxim identified the Company as a potential vehicle for a merger through
Jenny Zhang of Panda Investment LLC. Ms. Zhang’s firm was then retained by Ding
Neng Holdings to introduce the Company to Ding Neng Holdings.
On
September 6, 2010, Maxim was retained by Ding Neng Holdings to act as its
advisor. On September 8, 2010 Maxim met with Zhenyu Wang, chief executive
officer of the Company, and his advisor Chao Jiang, to discuss a potential
merger between the Company and Ding Neng Holdings. Over the course of the next
two weeks, the Company, Ding Neng Holdings and Maxim met and spoke several times
to discuss the structure for the potential merger. A term sheet was drafted by
Maxim and substantially agreed to by the parties.
On
September 23, 2010, Maxim met with Messrs. Nie and Huang in Beijing China and
further discussed the potential merger between Ding Neng Holdings and the
Company. Final adjustments were made to the deal structure and agreed to by the
parties. On September 27, 2010, a letter of intent was signed by the Company and
Ding Neng Holdings, and the Company issued a press release related to the
signing of the letter of intent on September 30, 2010.
From
October 4, through October 20, 2010, additional meetings and calls were held
among the Company and its advisors, including its legal counsel, and Ding Neng
Holdings, its legal counsel and Maxim. Key topics discussed during
this time period included timing of the deal, the exchange of due diligence
materials, responding to NASDAQ concerning potential delisting, preparation of
the Ding Neng Holdings financial audit and pro forma financial statements, terms
of the Share Exchange Agreement and drafting of the 14C Information
Statement.
On
October 15, 2010, an initial draft of the Share Exchange Agreement was
distributed which was further negotiated by the Company, Ding Neng Holdings and
their advisors over the next two weeks. From October 27, through October 29,
2010, the management team of Ding Neng Holdings, including Messrs. Nie and
Huang, met with the Company and Maxim in New York to discuss additional terms of
the merger.
Final
terms of the merger were then negotiated from November 1 through November 11,
2010. On November 11, 2010, the Company received the consents of the Board
and 55% of its shareholders approving the Acquisition.
On
November 12, 2010, the Share Exchange Agreement was signed by the Company, Ding
Neng Holdings and the Ding Neng Holdings Shareholders.
On
November 22, 2010, the Company received a decision from The Nasdaq Stock Market
(the “NASDAQ”) stating that a NASDAQ Hearings Panel had denied the Company's
request for continued listing on NASDAQ and would suspend trading, effective
November 24, 2010, and subsequently delist the Company's securities.
As a result of this delisting, the parties renegotiated the terms of
the acquisition and reached agreement on revised terms on December 3,
2010. An amendment to the share exchange agreement was executed by the
Company and Ding Neng Holdings on December 6, 2010.
The
Company’s Reasons for the Acquisition and Recommendation of the Company’s
Board
The Board
unanimously concluded that the Share Exchange Agreement, as amended, was in the
best interests of the Company’s stockholders. The Board did not obtain a
fairness opinion on which to base its assessment.
In
determining the Acquisition consideration, the Board focused on one primary
value that the Company shareholders would have if the Acquisition occurred,
namely the value of their stock in the combined company.
During
the quarter ended June 30, 2010, the Company began winding down its
operations. During the fourth quarter ended June 30, 2010, the
Company did not have any operating income. The weak economic market,
which resulted in a significant decline in revenues of all areas of the
Company’s business, led to the Company’s decision to wind down its
operations. Thus, the Company currently has no business operations
and is considered a shell company. Thus, the Board determined that a
reverse acquisition with an operating entity is the best choice for the
Company.
In
considering the combined companies, the Board believed that the most important
component of the transaction were the assets and operations of Ding Neng
Bio-tech. During the negotiations, Ding Neng Bio-tech’s management provided the
Company with financial statements for the fiscal year ended December 2009 and
the three and six months ended June 30, 2010. These financial statements
showed that Ding Neng Bio-tech is a growing company with potential for
additional growth in both revenue and net income. For the year ended
December 31, 2009 and the six months ended June 30, 2010, Ding Neng Bio-tech had
net income of approximately $2.1 million and $3.2 million, respectively, and
revenues of approximately $15.3 million and $14.8 million. The Board
also considered the Company’s current lack of business operations and its rapid
decline in revenue over the past year, its current stock price and its stock
price for the past year and terms of the Share Exchange Agreement, as
amended. The Board also noted that the Company’s stock had traded
under $1 since November 2009 and had recently been trading at prices as low as
$0.11 per share. The Board further considered the NASDAQ’s recent
decision to suspend trading of the Company's securities as of November 24,
2010 and to formally delist such securities approximately 45 days
thereafter.
As
described below, the Board considered both the potential advantages and
disadvantages of the Acquisition.
Potential
Advantages of the Acquisition with Ding Neng Holdings
In
considering and deciding to enter into the Share Exchange Agreement, as
amended, the Board gave considerable weight to the positive factors
discussed below, and they also considered the negative factors discussed under
the heading “Potential Disadvantages of the Ding Neng Holdings
Acquisition.”
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The
Company’s stockholders receive an ownership interest in Ding Neng
Holdings, which is currently a more profitable entity than the Company,
and which the Company’s management believes has future growth
potential.
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Ding
Neng Holdings had revenues and net income of $15.3 million and $2.1
million for the year ended December 31, 2009, $14.8 million and $3.2
million for the six months ended June 30, 2010 and $24.4 million and $6.2
million for the nine months ended September 30, 2010, respectively,
which shows a potential for growth and
value.
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Ding
Neng Holdings currently has ongoing operations, whereas the Company has
wound down its operations.
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Potential
Disadvantages of the Ding Neng Holdings Acquisition
The Board
evaluated potential disadvantages of entering into the Share Exchange Agreement,
as amended, as discussed below. They were not able to identify any factors
associated specifically with the Ding Neng Holdings acquisition that outweighed
the advantages of the Acquisition.
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The Common
Stock is currently traded on the Pink Sheets and it will need to re-apply
to NASDAQ to retain its listing upon completion of the Acquisition.
NASDAQ’s approval will require that the post-acquisition entity meet
NASDAQ’s initial listing requirements. If the post-acquisition entity is
unable to meet NASDAQ’s initial listing requirements, the Company will no
longer trade on the NASDAQ Capital
Market.
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Upon
the completion of the Acquisition, the Ding Neng Holdings Shareholders
will own a majority of the Company’s outstanding Common Stock. As such,
they will be in a position to control substantially all matters requiring
approval by the Company’s stockholders, including the election of a
majority of the Company’s directors and the approval of other business
transactions.
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The Board
concluded that, following the Acquisition, the overall advantages to the
Company’s stockholders would outweigh the disadvantages the Board had identified
in its analysis.
Fees
and Expenses
All fees
and expenses incurred in connection with the Share Exchange Agreement, as
amended, will be paid by the party incurring such expenses whether or not
the Share Exchange Agreement, as amended, is consummated. The Company
anticipates that it will incur total transaction costs of approximately
$250,000. Such costs do not include transaction costs of approximately $400,000
anticipated to be incurred by Ding Neng Holdings. These Ding Neng
Holdings costs will ultimately diminish the cash resources of the combined
company after the Acquisition.
Material
Federal Income Tax Consequences of the Acquisition
The
following section is a summary regarding material United States federal income
tax consequences of the Acquisition to holders of Common Stock. This discussion
addresses only those stockholders of the Company that hold their securities as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the Code), and does not address all the United States
federal income tax consequences that may be relevant to particular holders in
light of their individual circumstances or to holders that are subject to
special rules, such as:
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financial
institutions;
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investors
in pass-through entities;
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tax-exempt
organizations;
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dealers
in securities or currencies;
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traders
in securities that elect to use a mark to market method of
accounting;
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persons
that hold Common Stock as part of a straddle, hedge, constructive sale or
conversion transaction; and
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persons
who are not citizens or residents of the United
States
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This
summary of material federal income tax consequences is based upon the Code,
applicable treasury regulations thereunder, published rulings and court
decisions, all as currently in effect as of the date hereof, and all of which
are subject to change, possibly with retroactive effect. Tax considerations
under state, local and foreign laws, or federal laws other than those pertaining
to the income tax, are not addressed.
Neither
the Company nor Ding Neng Holdings intends to request any ruling from the
Internal Revenue Service as to the United States federal income tax consequences
of the Acquisition.
It is
anticipated that the Acquisition will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code and no gain or loss
will be recognized by the Company or Ding Neng Holdings as a result of the
Acquisition.
This
discussion is intended to provide all material United States federal income tax
consequences of the Acquisition to the Company and its stockholders who hold
their stock as a capital asset. This discussion is not a complete analysis or
description of all potential United States federal tax consequences of the
Acquisition to other holders who are subject to special rules. It does not
address any non-income tax or any foreign, state or local tax consequences of
the Acquisition. Accordingly, you are strongly urged to consult with your tax
advisor to determine the particular United States federal, state, local or
foreign income or other tax consequences to you of the Acquisition.
Anticipated
Accounting Treatment
The
Acquisition will be accounted for as a reverse merger, whereby Ding Neng
Holdings will be the continuing entity for financial reporting purposes and will
be deemed to be the acquirer of the Company. The acquisition is being accounted
for as a reverse merger because after the Acquisition the former Ding Neng
Holdings Shareholders will hold the majority of the outstanding shares of the
Company and will have the ability to initially appoint the majority of the
members of the board of directors of the Company.
In
accordance with the applicable accounting guidance for accounting for the
Acquisition as a reverse merger, first Ding Neng Holdings will be deemed to have
undergone a recapitalization, whereby its outstanding ordinary shares were
converted into shares of Common Stock. Immediately thereafter Ding
Neng Holdings, which is the continuing accounting entity, will have been deemed
to have acquired the assets and assumed the liabilities of the Company in
exchange for the issuance of the Company’s shares.
Regulatory
Matters
The
Acquisition and the transactions contemplated by the Share Exchange Agreement,
as amended, are not subject to any additional federal or state regulatory
requirements or approvals, including the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, or HSR Act.
THE
SHARE EXCHANGE AGREEMENT, AS AMENDED
The
discussion in this information statement of the Acquisition and the principal
terms of the Share Exchange Agreement, as amended, described below are
qualified in their entirety by reference to the copy of the Share Exchange
Agreement, as amended, attached as
Annexes A and B
,
hereto and incorporated herein by reference. The following description
summarizes the material provisions of the Share Exchange Agreement, as
amended, which agreement we urge you to read carefully because it is the
principal legal document that governs the Acquisition.
The
representations and warranties described below and included in the Share
Exchange Agreement, as amended, were made by the Company, Ding Neng
Holdings and the Ding Neng Holdings Shareholders as of November 12, 2010, the
date of Share Exchange Agreement and December 6, 2010, the date of
the amendment thereto. The assertions embodied in these representations and
warranties are subject to important qualifications and limitations agreed to by
the parties in connection with negotiating the Share Exchange Agreement, as
amended. The representations and warranties may also be subject to a contractual
standard of materiality that may be different from what may be viewed as
material to stockholders, or may have been used for the purpose of allocating
risk among the parties. The Share Exchange Agreement, as amended, is
described in this Information Statement and included as
Annexes A and
B
only to provide you with information regarding its terms and
conditions at the time it was entered into by the parties. Accordingly, you
should read the representations and warranties in the Share Exchange Agreement,
as amended, not in isolation but rather in conjunction with the other
information contained in this document.
Basic
Deal Terms
The Share
Exchange Agreement, as amended, provides for an acquisition transaction in which
the Company will acquire from the Ding Neng Holdings Shareholders, 100% of Ding
Neng Holdings in exchange for the issuance of shares of Common Stock
representing 90% of the Common Stock issued and outstanding immediately
following the closing of the Acquisition. Ding Neng Holdings is a
holding company that owns 100% of Fuhua, which has, through various contractual
agreements, management control and the rights to the profits of Ding Neng
Bio-tech, as a variable interest entity.
Upon
completion of the Acquisition, the current owners of the Company and the Ding
Neng Holdings Shareholders will own 4% and 90%, respectively, of the
post-acquisition entity’s Common Stock issued and outstanding. 4.5%
will be issued to Maxim in connection with its services provided to complete the
Acquisition.
Representations
and Warranties
In the
Share Exchange Agreement, as amended, Ding Neng Holdings, DBT, Fuhua and Ding
Neng Bio-tech, make certain representations and warranties (subject to certain
exceptions) relating to, among other things:
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organization
and standing;
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financial
statements accuracy
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accuracy
of statements included in this Information
Statement
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absence
of certain changes or events
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consents
and approvals;
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compliance
with applicable laws;
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authority
and enforceability
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validity
of the Share Exchange Agreement, as amended;
and
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transactions
with affiliates.
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In the
Share Exchange Agreement, as amended, the Ding Neng Holdings Shareholders make
certain representations and warranties (subject to certain exceptions) relating
to, among other things:
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purchase
of the Common Stock in the Acquisition for investment purposes;
and
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status
as an exempt person under Regulation
S.
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In the
Share Exchange Agreement, as amended, the Company makes certain
representations and warranties (subject to certain exceptions) relating to,
among other things:
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organization
and standing;
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subsidiaries
and predecessors;
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financial
statement accuracy;
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accuracy
of statements included in this Information
Statement
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absence
of certain changes or events;
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consents
and approval required;
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compliance
with applicable laws;
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registration
of securities with the SEC;
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actions
against takeover provisions;
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transactions
with affiliates;
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bank
accounts and powers of attorney;
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validity
and enforceability;
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Office
of Foreign Assets Control of the U.S. Treasury
Department;
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employee
benefit plans or programs;
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absence
of certain changes;
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restrictions
on business activities;
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Investment
Company Act;
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past
business operations;
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business
practices; and
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possession
of license and permits.
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Conditions
to Closing
Ding
Neng Holdings and Ding Neng Holdings Shareholders Conditions to
Closing
The
obligations of Ding Neng Holdings and Ding Neng Holdings Shareholders to enter
into and complete the closing are subject to the fulfillment on or prior to the
closing date of, among other items, the following conditions by the Company, any
one or more of which may be waived by Ding Neng Holdings and Ding Neng Holdings
Shareholders:
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the
representations and warranties made by the Company in the Share Exchange
Agreement shall be true as of the date thereof and the closing and the
Company shall have performed and complied with the covenants and
conditions therein;
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the
Reverse Stock Split must have been
effected;
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the
Name Change must have been approved by the Company’s Board and
shareholders;
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the
Company must have been continuously listed on the Pink Sheets through the
date of closing;
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Ding
Neng Holdings must have received a copy of an irrevocable letter to the
Company’s transfer agent authorizing the issuance of Common Stock to the
Ding Neng Holdings Shareholders;
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no
litigation, proceeding, investigation or inquiry will be pending or, to
the Company’s knowledge, have been threatened, which may result in an
action to enjoin or prevent the completion of the Acquisition, to the
extent not already disclosed;
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no
order, statute, rule, regulation, executive order, injunction, stay,
decree, judgment or restraining order shall have been enacted, entered,
promulgated or enforced by any court or governmental or regulatory
authority or instrumentality which prohibits the consummation of the
Acquisition; and
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all
consents, approvals, waivers or amendments pursuant to all contracts,
licenses, permits, trademarks and other intangibles in connection with the
Acquisition must have been
obtained.
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The
Company’s Conditions to Closing
The
obligations of the Company to enter into and complete the closing are subject to
the fulfillment on or prior to the closing date of, among other items, the
following conditions by Ding Neng Holdings and Ding Neng Holdings Shareholders,
any one or more of which may be waived by the Company in writing:
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the
representations and warranties made by Ding Neng Holdings and the Ding
Neng Holdings Shareholders in the Share Exchange Agreement shall be true
as of the date thereof and the closing and Ding Neng Holdings and the Ding
Neng Holdings Shareholders shall have performed and complied with the
covenants and conditions therein;
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no
order, statute, rule, regulation, executive order, injunction, stay,
decree, judgment or restraining order shall have been enacted, entered,
promulgated or enforced by any court or governmental or regulatory
authority or instrumentality which prohibits the consummation of the
Acquisition; and
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all
consents, approvals, waivers or amendments pursuant to all contracts,
licenses, permits, trademarks and other intangibles in connection with the
Acquisition must have been
obtained.
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Covenants
of the Parties
In the
Share Exchange Agreement, as amended, Ding Neng Holdings and Ding Neng
Holdings Shareholders have covenanted to the following:
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Ding
Neng Holdings has agreed to deliver to Company (i) audited financial
statements prepared in accordance with U.S. GAAP for each fiscal year,
beginning with the year ended December 31, 2009 and 2008, and (ii)
unaudited interim financial statements prepared in accordance with U.S.
GAAP for the nine months ended September 30, 2010 at the
closing;
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to
cooperate in order to obtain any required third party consents to the
Share Exchange Agreement, as amended, and the
Acquisition;
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not
to seek an alternative transaction or from taking any action to solicit an
alternative acquisition proposal;
and
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to
carry on business in the ordinary and usual course consistent with past
practice and not sell, pledge or assign assets, except in the regular
course of business, declare dividends, redeem or sell securities, incur
newly funded liabilities, acquire or dispose of fixed assets, enter into
any material or long-term contract, guarantee the obligations of a third
party, settle or discharge any account receivable for less than its stated
amount, pay more on any liability than its stated amount, or enter into
any other transaction other than in the regular course of
business.
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In the
Share Exchange Agreement, as amended, the Company has covenanted to the
following:
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deliver
the corporate minute books and
records;
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to
cooperate in order to obtain any required third party consents to the
Share Exchange Agreement, as amended, and the
Acquisition;
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Zhenyu
Wang will resign as the chief executive
officer;
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Zhenyu
Wang will use his reasonable best efforts to provide information in
connection with any securities filings with the
SEC;
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not
to seek an alternative transaction or from taking any action to solicit an
alternative acquisition proposal;
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to
carry on business in the ordinary and usual course consistent with past
practice and not sell, pledge or assign assets, except in the regular
course of business, declare dividends, redeem or sell securities, incur
newly funded liabilities, acquire or dispose of fixed assets, enter into
any material or long-term contract, guarantee the obligations of a third
party, settle or discharge any account receivable for less than its stated
amount, pay more on any liability than its stated amount, or enter into
any other transaction other than in the regular course of business;
and
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not
to amend the Company’s certificate of incorporation or its bylaws, except
as contemplated by the Share Exchange Agreement, as
amended.
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Indemnification
Zhenyu
Wang has agreed, for one year after the closing, to indemnify and hold harmless
Ding Neng Holdings and its affiliates, and their respective officers, directors,
employees and agents from and against any liabilities resulting from any
material breach or inaccuracy by the Company of any representations, warranties,
covenants or agreements included in the Share Exchange Agreement and any fraud
committed by the willful breach of the Share Exchange
Agreement. There is no provision for indemnification by Ding Neng
Holdings or Ding Neng Holdings Shareholders.
Termination
Unless
waived in writing, the transactions contemplated by the Share Exchange
Agreement, as amended, may be terminated and/or abandoned at any time prior
to the closing:
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by
mutual written consent of the parties to the Share Exchange Agreement, as
amended;
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by
written notice of the Company if the closing conditions have not been
satisfied by Ding Neng Holdings or the Ding Neng Holdings Shareholders, as
the case may be;
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by
written notice of Ding Neng Holdings or the Ding Neng Holdings
Shareholders if the closing conditions have not been satisfied by the
Company;
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by
written notice by either the Company or Ding Neng Holdings if the
Acquisition has been permanently restrained, enjoined, or otherwise
prevented or prohibited by a government
authority;
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by
written notice of any party if there has been a breach by any other party
hereto of any of its material representations, warranties, covenants or
agreements, or if any material representation or warranty of any other
party shall have become untrue or inaccurate, and the breach or inaccuracy
cannot be cured prior to closing or is not cured within twenty days of
notice of such breach or inaccuracy;
and
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by
written notice by the Company or Ding Neng Holdings, if either party
discovers any fact or circumstance that has, or could reasonably be
expected to have, a material adverse effect, that was discovered in
connection with the completion of the due diligence review of the other
parties hereto.
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Exclusivity;
No Other Negotiation
The Share
Exchange Agreement, as amended, contains detailed provisions prohibiting each of
the Company, Ding Neng Holdings, Ding Neng Bio-tech and the Ding Neng Holdings
Shareholders and Ding Neng Bio-tech from seeking an alternative transaction.
These covenants generally prohibit the Company, Ding Neng Holdings, Ding Neng
Bio-tech and the Ding Neng Holdings Shareholders and Ding Neng Bio-tech which
are parties to the Share Exchange Agreement, as amended, as well as their
officers, directors, subsidiaries, employees, agents and representatives, from
taking any action to solicit an alternative acquisition proposal.
Effect
of Termination; No Termination Fee
If the
Share Exchange Agreement, as amended, is terminated in accordance with its
termination provisions, then each party will be responsible for the payment of
the expenses and fees incurred by it in connection with or related to the
transactions contemplated thereby, all further obligations of the parties shall
terminate, no party shall have any right against the other party thereto, and
each party will bear its own costs and expenses.
Conclusion
of the Company’s Board of Directors
After
careful consideration of all relevant factors, the Board unanimously determined
that the Acquisition pursuant to the Share Exchange Agreement, as
amended, was in the best interests of the Company and its
stockholders. The foregoing discussion of the information and factors
considered by the Board is not meant to be exhaustive, but includes the material
information and factors considered by the board of directors.
CERTAIN
AGREEMENTS RELATING TO THE ACQUISITION
Employment
Agreement with Zhenyu Wang
At the
time of closing the Acquisition, Ding Neng Holdings and Zhenyu Wang will enter
into a 2 year employment agreement which will include an understanding by Mr.
Wang that he will not take any steps adverse to the interests of the
post-acquisition entity and its other shareholders. Pursuant to the
employment agreement, Mr. Wang will receive an annual salary of $150,000 and
equity of the post-acquisition entity equal to 1.0% upon execution of the
agreement plus an additional 0.5% over the term of the employment agreement
(0.25% after the first year and 0.25% after the second).
INFORMATION
ABOUT CHINA INSONLINE CORP.
DESCRIPTION
OF BUSINESS
History
of the Company
China
INSOnline Corp. was initially incorporated on December 23, 1988 as Lifequest
Medical, Inc. (“
DEXT
”) as a Delaware
corporation and commenced operations on January 1, 1989 as a distributor of
instruments, equipment and surgical supplies used in hand-assisted laparoscopic
surgery (“
HALS
”). In
August 1992, we completed our initial public offering of our common stock, par
value $0.001 per share. In March 1999, we acquired Dexterity
Incorporated, a Delaware corporation (“
Dexterity
”), which
was located in the Philadelphia, Pennsylvania and had the exclusive rights to
the Dexterity Pneumo Sleeve and Dexterity Protractor proprietary instruments,
equipment and supplies used in HALS. In connection with this acquisition, we
changed our name from LifeQuest Medical, Inc. to Dexterity Surgical,
Inc.
On April
19, 2004, DEXT filed a voluntary petition for relief for reorganization (the
“
Reorganization
”)
under Chapter 11 of the United States Bankruptcy Code (the “
Bankruptcy Code
”) in
the United States Bankruptcy Court for the Southern District of Texas Houston
Division. We underwent numerous operating changes and operated our business as a
“debtor-in-possession” under the jurisdiction of the Bankruptcy Court. On
March 2, 2005, the Bankruptcy Court entered an Order confirming its First
Amended Plan of Liquidation. In connection with that Plan, DEXT’s assets
were scheduled to be auctioned, which auction culminated in the sale of
substantially all of DEXT’s assets as approved by the Bankruptcy Court on March
17, 2006. The First Amended Plan of Liquidation was subsequently
amended on March 2, 2006, by an order titled “Order Approving Modification of
the First Amended Plan” (the “
Order
”). The
amendments provided for in the Order included the Bankruptcy Court’s
authorization of a $50,000 Debtor-In-Possession Loan (the “
DIP Loan
”) for
payment of administrative expenses of the bankruptcy, which converted into
6,000,000 shares of Common Stock (the “
Section 1145 Shares
”)
and 3,000,000 warrants (the “
Section 1145
Warrants
”) under Section 1145 of the U.S. Bankruptcy Code at the option
of the holder(s) of the DIP Loan. Immediately prior to the Exchange (as defined
and discussed in detail herein below), the Section 1145 Warrants were cancelled.
For an additional $125,000, the Bankruptcy Court authorized the sale of
25,000,000 restricted shares of Common Stock to an investor for the payment of
both administrative claims and creditor claims. The Bankruptcy Court also
provided as follows:
|
·
|
All of the old shares of the
Company’s preferred stock, stock options and warrants shall be (and have
been) cancelled;
|
|
·
|
The Company shall issue (and did
issue) 29,800 new shares of Common Stock under Section 1145 of the U.S.
Bankruptcy Code;
|
|
·
|
The Company shall issue up to
25,000 shares of Common Stock under Section 1145 of the U.S. Bankruptcy
Code to those persons deemed appropriate by the Directors (it was not
necessary to issue these shares and therefore they have been cancelled);
and
|
|
·
|
Appoint new Board members, amend
the Certificate of Incorporation to increase the authorized shares of
Common Stock to 100,000,000, amend the Bylaws, change the fiscal year,
execute a share exchange agreement and issue shares in which effective
control or majority ownership is given, all without stockholder
approval.
|
Pursuant
to the Bankruptcy Court Order, by filing a Certificate of Amendment to the
Certificate of Incorporation, the Company increased its authorized Common Stock,
and effected a 1-for-500 reverse split of all issued and outstanding Common
Stock. Immediately following the Exchange, there were 35,706,250 shares of
Common Stock issued and outstanding and 4,293,750 Section 1145 Shares issuable
pursuant to the Reorganization. As of September 30, 2010, all of the 4,293,750
Section 1145 Shares have been issued and 46,000,000 shares are now issued and
outstanding.
On
December 18, 2007 (the “
Closing Date
”), the
Company entered into a Share Exchange Agreement (the “
Exchange Agreement
”)
with Rise and Grow Limited, a Hong Kong limited company (“
Rise & Grow
”) and
Newise Century Inc., a British Virgin Islands company and sole stockholder of
Rise & Grow (the “
Stockholder
”). As a
result of the share exchange, DEXT acquired all of the issued and outstanding
securities of Rise & Grow, an inactive holding company, from the Stockholder
in exchange for Twenty-Six Million Four Hundred Thousand (26,400,000)
newly-issued shares of Common Stock, representing 73.94% of DEXT’s issued and
outstanding Common Stock (the “
Exchange
”) as of the
Closing Date and sixty-six percent (66%) of the total number of issued and
outstanding shares of Common Stock after the issuance of the remaining 4,293,750
“Section 1145” shares. As a result of the Exchange, Rise & Grow became our
wholly-owned and chief operating subsidiary.
On
October 28, 2008, the Company, through its subsidiary, acquired 100% ownership
of Guang Hua Insurance Agency Company Limited (“
GHIA
”), a limited
liability company organized under the laws of the PRC, in exchange for
US$5,846,244 (RMB40,000,000). GHIA is an insurance agent company
which operates in the PRC.
June
2010 Sale of Subsidiaries
On June
30, 2010, the Company entered into a Share Purchase Agreement (the “
Share Purchase
Agreement
”) with Hong Kong Jing Nuo International Limited, a Hong Kong
limited company (the “
Buyer
”), a third
party not affiliated with the Company or any of the Company’s
subsidiaries. Pursuant to the terms of the Share Purchase Agreement,
the Company sold to the Buyer, and the Buyer purchased from the Company (the
“
Transaction
”)
all of the issued and outstanding ownership shares of Rise & Grow, for
a purchase price equal to US$100,000. As a result of the Transaction, the
Company sold all of its interests in (1) Rise & Grow, (2) New Fortune
Associate (Beijing) Information Technology Co., Ltd. (“
NFA
”), a limited
liability company organized under the laws of the People’s Republic of China
(the “
PRC
”) and
a wholly owned subsidiary of R&G, and (3) Beijing ZYTX Technology Co., Ltd
(“
ZYTX
”), a
Variable Interest Entity (“
VIE
”) and a limited
liability company organized under the laws of PRC. ZYTX was wholly
controlled by R&G through NFA, through a series of contractual
agreements.
In
anticipation of the Transaction, the Company engaged in an earlier transaction
on June 23, 2010 whereby all the issued and outstanding ownership interest of
Guang Hua Insurance Agency Company Limited (“
GHIA
”), a limited
liability company organized under the laws of the PRC, which was then a
wholly-owned subsidiary of Rise & Grow through ZYTX acting as its
legal owner in the PRC, were transferred and sold, for consideration received,
to Ever Trend Investment Limited (“
ETI
”), a Hong Kong
limited company and a wholly owned subsidiary of the Company, and Beijing San
Teng Da Fei Technology Development Co., Ltd. (“
STDF
”), a company
organized under the laws of the PRC and a VIE controlled by ETI through its
wholly-owned PRC subsidiary Run Ze Yong Cheng (Beijing) Technology Co., Ltd., a
limited liability company organized under the laws of the PRC, pursuant to that
certain Share Purchase Agreement dated as of June 23, 2010 (the “
Purchase Agreement
”)
by and among Rise & Grow and ZYTX, together as the GHIA seller, and ETI and
STDF, together as the GHIA purchaser. The terms of the Purchase Agreement
allowed the Company to retain its ownership interest in GHIA notwithstanding the
Transaction consummated on June 30, 2010. As a result of the transaction
consummated on June 23, 2010, GHIA became a wholly-owned subsidiary of ETI
through STDF acting as its legal owner in the PRC.
A
graphical depiction of the Transaction and the transactions under the Purchase
Agreement is as follows:
Also in
connection with the Transaction, the Company’s subsidiary ZYTX entered into a
Tri-party Creditor’s Rights Transfer Agreement (“
Creditor’s
Agreement
”) with the Company’s subsidiary STDF and a third party, Beijing
Yingtong Jixun Sci-Tech Development Co., Ltd. (“
YTJX
”), a limited
liability company organized under the laws of the PRC. At the time,
the Company had prepaid approximately US$20.5 million, to YTJX for wireless
Internet terminal products. Pursuant to the Creditor’s Agreement,
ZYTX transferred and sold, for consideration received, a portion of its prepaid
account with YTJX to STDF, with YTJX’s express approval of the transfer.
Concurrently, ZYTX entered into a Software Copyright Transfer Agreement (“
Software Agreement
”)
with STDF, pursuant to which ZYTX transferred and sold, for consideration
received, certain software, copyright and intellectual property rights to STDF.
As a result of the Creditor’s Agreement and the Software Agreement, the Company
retained the certain assets of ZYTX, whose equity was subsequently sold to a
third party in the Transaction.
The
structure of the Company after the June 2010 transactions is illustrated as
follows:
Winding
Down of Operations
During
the quarter ended June 30, 2010, the Company began winding down its
operations. During the fourth quarter ended June 30, 2010, the
Company did not have any operating income. The weak economic market,
which resulted in a significant decline in revenues of all areas of the
Company’s business, led to the Company’s decision to wind down its
operations. Thus, the Company currently has no business operations
and is considered a shell company. Management is currently looking to
either sell shares of the Company to a third party through a reverse acquisition
or complete a business combination or other similar transaction.
The
Company currently has some nominal office equipment remaining on the
books. The Company is currently looking for a buyer to purchase these
assets.
Going
Concern
We
received a report from our independent registered public accountants, relating
to our June 30, 2010 audited consolidated financial statements, containing an
explanatory paragraph regarding our ability to continue as a going
concern.
As a
company with no operating business, management believes that the Company will
not be able to generate operating cash flows sufficient to fund its operations
in the next twelve months . Based upon our current limited cash resources and
without the infusion of additional capital, management does not believe the
Company can operate as a going concern beyond one year.
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, our
consolidated financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should we be unable to continue as a going concern.
Since
winding down our operations in the quarter ended June 30, 2010, we have had no
continuing business operations.
Business
Operations Prior to Winding Down
Prior to
winding down our operations during the quarter ended June 30, 2010, we were an
Internet services and media company focused on the PRC insurance industry. The
Company primarily offered a network portal through its industry website,
www.soobao.cn
(hereinafter also referred to as “
Soobao
”), to
insurance companies, agents and consumers for advertising, online inquiry, news
circulation, online transactions, statistic analysis and software
development. This primarily entailed the offer of online insurance
products and services in China including (a) a network portal for the Chinese
insurance industry (
www.soobao.cn
),
offering industry professionals a forum for the advertising and promotion of
products and services, (b) website construction for marketing teams and others
in the insurance industry, (c) software development, (d) insurance agency
services whereby the Company generated sales commissions on motor vehicle
insurance, property insurance and life insurance and (e) accompanying client
support services.
Employees
As of
September 30, 2010, the Company had 7 full-time employees. None of
our employees are covered by a collective bargaining
agreement.
Intellectual
Property
We
currently do not own any trademarks or patents. In April 2007, the Company filed
for its website (
www.soobao.cn
) with
the Beijing Industrial Commercial Bureau.
Government
Regulation
Because
we currently have no business operations, produce no products nor provide any
services, we are not presently subject to any governmental regulation in this
regard. However, in the event that we complete a business combination
transaction, we will become subject to all governmental approval requirements to
which the reorganized, merged or acquired entity is subject or may become
subject.
DESCRIPTION
OF PROPERTY
GHIA had
one (1) office during the year ended June 30, 2010 at Room 508 Shangdu
International Center, No.8 Dongdaqiao Road, Chaoyang District, Beijing,
China. This was GHIA’s operating office, which consisted of
approximately one hundred and sixty seven (167) square
meters. GHIA paid RMB 18,000 (US$2,698) per month to lease this
office during the fiscal year ended June 30, 2010. At September 30,
2010, GHIA continues to use this same location as its office.
LEGAL
PROCEEDINGS
In the
normal course of business, we are named as defendant in lawsuits in which claims
are asserted against us. In our opinion, the liabilities, if any, which may
ultimately result from such lawsuits, are not expected to have a material
adverse effect on our financial position, results of operations or cash flows.
As of the date of filing this Report, there is no outstanding
litigation.
On March
15, 2010, the Wall Street Transcript Corp. (the “Plaintiff”) filed complaint
against China INSOnline Corp. regarding an invoice of $1,450 that was
outstanding since July 23, 2008, for certain webcasting services provided to the
Company at Collins Stewart Fourth Annual Growth Conference on July 8-10, 2008.
The Company settled with Plaintiff on April 26, 2010.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
Since
November 24, 2010, our Common Stock has been traded on the Pink sheets under the
symbol "CHIO.PK." From July 2008 through November 23, 2010 our Common
Stock
was
quoted on the NASDAQ Capital
Market.
The following table sets
forth on a per share basis for the periods shown, the high and low sales prices
of our Common Stock. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions.
|
|
|
Fiscal Year
Ended June 30,
2009
|
|
|
Fiscal Year Ended
June 30, 2010
|
|
|
Fiscal Year Ended
June 30, 2011
|
|
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
First
Quarter ended September 30
|
|
$
|
3.00
|
|
|
$
|
4.74
|
|
|
$
|
0.87
|
|
|
$
|
1.92
|
|
|
$
|
0.18
|
|
|
$
|
0.38
|
|
|
Second
Quarter ended December 31
|
|
$
|
1.09
|
|
|
$
|
3.69
|
|
|
$
|
0.62
|
|
|
$
|
1.64
|
|
|
$
|
0.04
|
*
|
|
$
|
0.31
|
*
|
|
Third
Quarter ended March 31
|
|
$
|
0.17
|
|
|
$
|
1.69
|
|
|
$
|
0.40
|
|
|
$
|
0.95
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Fourth
Quarter ended June 30
|
|
$
|
0.42
|
|
|
$
|
2.17
|
|
|
$
|
0.33
|
|
|
$
|
0.42
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
*
|
This
information is provided through December 3,
2010.
|
On
December 3, 2010, the closing price for our common stock, as reported by the
NASDAQ Capital Market, was $0.04 per share.
Holders
of Common Equity
As of
December 3, 2010, we have an aggregate of 46,000,000 shares of our Common Stock
issued and outstanding and 250 stockholders of record.
As of
December 3, 2010, Ding Neng Holdings has an aggregate of 50,000 ordinary shares
issued and outstanding and 14 shareholders.
Dividends
We have
never declared or paid any cash dividends or distributions on our Common Stock.
We currently intend to retain our future earnings to support operations and to
finance future growth and expansion and, therefore, do not anticipate paying any
cash dividends on our Common Stock in the foreseeable future.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table discloses information as of June 30, 2010 with respect to
compensation plans (including individual compensation arrangements) under
which our equity securities are authorized for issuance.
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
Plan Category
|
|
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
|
|
|
Equity
Compensation plans approved by security holders
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,000,000
|
(1)
|
|
Equity
Compensation plans not approved by security holders
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,000,000
|
|
(1) In
June 2010, the Company’s shareholders approved and adopted the 2010 Stock Option
Plan, which authorized the potential issuance of up to 6,000,000 shares of
Common Stock to employees, directors and consultants. Options granted
under the 2010 Stock Option Plan generally have a term of ten years from the
date of grant unless otherwise specified in the option agreement. The 2010 Stock
Option Plan expires in June 2020.
Subsequent
to June 30, 2010, the Company made the following issuances of unregistered
securities:
On July
8, 2010, the Company issued to two engineering consultants, options to purchase
an aggregate of up to 3,000,000 shares of Common Stock as compensation for IT
consulting and advisory services. The options had an exercise
price of $0.001 per share and were scheduled to expire on July 8,
2020. On July 19, 2010, the consultants exercised the options for all
3,000,000 shares. We relied upon the exemption from registration
under Section 4(2) in connection with these issuances.
On July
15, 2010, the Company issued to two financial consultants, options to purchase
an aggregate of up to 3,000,000 shares of Common Stock as compensation to
provide public relationship services in (1) referring the investment banks,
funds, investors and potential merger and acquisition targets to the Company and
assisting the Company in negotiating the contractual terms, (2) assisting the
Company to make a marketing and investor relations plan to improve the liquidity
of stock, (3) arranging road shows for the Company and meeting with potential
investors and potential merger and acquisition targets, and (4) providing other
financial advisory and services. The options had an exercise
price of $0.001 per share and were scheduled to expire on July 15,
2020. On July 21, 2010, the financial consultants exercised the
options for all 3,000,000 shares. We relied upon the exemption from
registration under Section 4(2) in connection with these issuances.
Transfer
Agent and Registrar
Our
transfer agent is Corporate Stock Transfer, located at 3200 Cherry Creek Drive
South, Suite 430, Denver, Colorado 80209. Their telephone number is (303)
282-4800.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Forward
Looking Statements
The
following is management’s discussion and analysis of certain significant factors
which have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as well
as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words “believes”
“anticipates”, “may”, “will”, “should”, “expect”, “intend”, “estimate”,
“continue” and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the SEC from time to
time, which could cause actual results or outcomes to differ materially from
those projected. Undue reliance should not be place on these forward-looking
statements which speak only as of the date of filing this Report. We undertake
no obligation to update these forward-looking statements.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Annual Report.
Overview
China
INSOnline Corp. was incorporated on December 23, 1988 as a Delaware corporation
and commenced operations on January 1, 1989.
During
the quarter ended June 30, 2010, the Company began winding down its
operations.
Sale
of Subsidiaries
On June
30, 2010, the Company entered into a Share Purchase Agreement (the “
Share Purchase
Agreement
”) with Hong Kong Jing Nuo International Limited, a Hong Kong
limited company (the “
Buyer
”), a third
party not affiliated with the Company or any of the Company’s
subsidiaries. Pursuant to the terms of the Share Purchase Agreement,
the Company sold to the Buyer, and the Buyer purchased from the Company (the
“
Transaction
”)
all of the issued and outstanding ownership shares of Rise & Grow, for
a purchase price equal to US$100,000. As a result of the Transaction, the
Company sold all of its interests in (1) Rise & Grow, (2) New Fortune
Associate (Beijing) Information Technology Co., Ltd. (“
NFA
”), a limited
liability company organized under the laws of the People’s Republic of China
(the “
PRC
”) and
a wholly owned subsidiary of R&G, and (3) Beijing ZYTX Technology Co., Ltd
(“
ZYTX
”), a
Variable Interest Entity (“
VIE
”) and a limited
liability company organized under the laws of PRC. ZYTX was wholly
controlled by R&G through NFA, through a series of contractual
agreements.
In
anticipation of the Transaction, the Company engaged in an earlier transaction
on June 23, 2010 whereby all the issued and outstanding ownership interest of
Guang Hua Insurance Agency Company Limited (“
GHIA
”), a limited
liability company organized under the laws of the PRC, which was then a
wholly-owned subsidiary of Rise & Grow through ZYTX acting as its
legal owner in the PRC, were transferred and sold, for consideration received,
to Ever Trend Investment Limited (“
ETI
”), a Hong Kong
limited company and a wholly owned subsidiary of the Company, and Beijing San
Teng Da Fei Technology Development Co., Ltd. (“
STDF
”), a company
organized under the laws of the PRC and a VIE controlled by ETI through its
wholly-owned PRC subsidiary Run Ze Yong Cheng (Beijing) Technology Co., Ltd., a
limited liability company organized under the laws of the PRC, pursuant to that
certain Share Purchase Agreement dated as of June 23, 2010 (the “
Purchase Agreement
”)
by and among Rise & Grow and ZYTX, together as the GHIA seller, and ETI and
STDF, together as the GHIA purchaser. The terms of the Purchase Agreement
allowed the Company to retain its ownership interest in GHIA notwithstanding the
Transaction consummated on June 30, 2010. As a result of the transaction
consummated on June 23, 2010, GHIA became a wholly-owned subsidiary of ETI
through STDF acting as its legal owner in the PRC.
Also in
connection with the Transaction, the Company’s subsidiary ZYTX entered into a
Tri-party Creditor’s Rights Transfer Agreement (“
Creditor’s
Agreement
”) with the Company’s subsidiary STDF and a third party, Beijing
Yingtong Jixun Sci-Tech Development Co., Ltd. (“
YTJX
”), a limited
liability company organized under the laws of the PRC. At the time,
the Company had prepaid approximately US$20.5 million, to YTJX for wireless
Internet terminal products. Pursuant to the Creditor’s Agreement,
ZYTX transferred and sold, for consideration received, a portion of its prepaid
account with YTJX to STDF, with YTJX’s express approval of the transfer.
Concurrently, ZYTX entered into a Software Copyright Transfer Agreement (“
Software Agreement
”)
with STDF, pursuant to which ZYTX transferred and sold, for consideration
received, certain software, copyright and intellectual property rights to STDF.
As a result of the Creditor’s Agreement and the Software Agreement, the Company
retained the certain assets of ZYTX, whose equity was subsequently sold to a
third party in the Transaction.
Winding
Down of Operations
During
the quarter ended June 30, 2010, the Company began winding down its
operations. During the fourth quarter ended June 30, 2010, the
Company did not have any operating income. The weak economic market,
which resulted in a significant decline in revenues of all areas of the
Company’s business, led to the Company’s decision to wind down its
operations. Thus, the Company currently has no business operations
and is considered a shell company. Management is currently looking to
either sell shares of the Company to a third party through a reverse acquisition
or complete a business combination or other similar transaction.
The
Company currently has some nominal office equipment remaining on the
books. The Company is currently looking for a buyer to purchase these
assets.
Going
Concern
We
received a report from our independent registered public accountants, relating
to our June 30, 2010 audited consolidated financial statements, containing an
explanatory paragraph regarding our ability to continue as a going
concern.
As a
company with no operating business, management believes that the Company will
not be able to generate cash flows sufficient for the next twelve months. Based
upon our current limited cash resources and without the infusion of additional
capital, management does not believe the Company can operate as a going concern
beyond one year.
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, our
consolidated financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should we be unable to continue as a going concern.
As a
result of winding down all our core operations during the quarter ended June 30,
2010, we have classified the results of our operations as discontinued
operations for all periods presented.
Results
of Operations
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2009
For
the Three Months Ended September 30, 2010 Compared To Three Months Ended
September 30, 2009
Our
operating results are presented on a condensed consolidated basis for the three
months ended September 30, 2010, as compared to the three months ended September
30, 2009.
(Loss)
Income From Discontinued Operations, Net of Tax
During
the year ended June 30, 2010, the weak economic market resulted in a significant
decline in revenues of all areas of the Company’s business. Based on
this decline, the Company decided to wind down its operations in June
2010. As of September 30, 2010, the Company had no business
operations and was considered a shell company. Upon winding
down all business operations in June 2010, the Company reclassified all of its
revenues and expenses as previously reported on its Statements of Operations and
Comprehensive Income (Loss), as a single item, “(Loss) Income from Discontinued
Operations, Net of Tax” for all periods presented in accordance with U.S.
GAAP.
The
Company had a loss from discontinued operations, net of tax of $2,283,433 and
income from discontinued operations, net of tax of $3,120,617 for the three
months ended September 30, 2010 and 2009, respectively. The decrease
in income from operations, which were discontinued in June 2010, of $5,404,050
or 173%, is due to the weak economic market that resulted in a significant
decline in revenues of all areas of the Company’s business and professional fees
paid to consultants assisting us in seeking further business alternatives and in
exploring other acquisition and merger opportunities after winding down of
operations in June 2010. Such fees paid to the consultants were in the form of
option awards, pursuant to which the Company recognized $1,974,175 in expenses
related to the fair value of such option awards for the three months ended
September 30, 2010.
Results
by Segment
As of
September 30, 2010, the Company had no operations and thus, only one
segment. All three of the segments as of September 30, 2009 (software
development, online insurance advertising and insurance agency) and their
corresponding revenues and expenses as previously reported on its Statements of
Operations and Comprehensive Income (Loss) have, as of September 30, 2010, been
reclassified as a single item, “(Loss) Income from Discontinued Operations, Net
of Tax” for all periods presented in accordance with U.S. GAAP. See
“(Loss) Income From Discontinued Operations, Net of Tax above.”
Material
Commitments
The
Company occupies office space leased from third parties. For the
three months ended September 30, 2010 and 2009, the Company recorded $16,370 and
$28,988, respectively, as rental expense for such office space. As of
September 30, 2010, the Company has outstanding commitments with respect to
non-cancelable operating leases as follows:
|
Year
Ending June 30,
|
|
Amount
|
|
|
2011
|
|
$
|
10,749
|
|
This
decrease is due to a reduction of office space in the current location and also
reduction in the number of offices compared to September 30, 2009.
|
(b)
|
Purchase
of Electronic Products
|
As of
September 30, 2010 and 2009, the Company has outstanding commitments with
respect to the purchase of electronic products of $0 and $745,876,
respectively.
The
decrease is due to re-negotiating and cancelling these agreements with our
outside vendors, owing to the disposal of a subsidiary during June 2010, which
was the named party in the agreements.
Liquidity
and Capital Resources
Cashflow
As of
September 30, 2010, the Company had $115,711
in bank deposits with a
bank in China, which comprised 99.5% of its total cash and cash equivalent as of
such date.
Below is
a summary our Statement of Cashflow for the three months ended September 30,
2010:
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
15,203
|
|
|
$
|
174,151
|
|
|
$
|
(158,948
|
)
|
|
|
(91
|
)%
|
|
Investing
activities
|
|
|
6,000
|
|
|
|
(725,515
|
)
|
|
|
731,515
|
|
|
|
101
|
%
|
|
Financing
activities
|
|
|
110,998
|
|
|
|
-
|
|
|
|
110,998
|
|
|
|
100
|
%
|
|
Net
change in cash and cash equivalents
|
|
|
132,201
|
|
|
|
(551,364
|
)
|
|
|
683,565
|
|
|
|
124
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(108,584
|
)
|
|
|
(17,784
|
)
|
|
|
(90,800
|
)
|
|
|
(511
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
92,094
|
|
|
|
1,217,085
|
|
|
|
(1,124,991
|
)
|
|
|
(92
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
115,711
|
|
|
$
|
647,937
|
|
|
$
|
(532,226
|
)
|
|
|
(82
|
)%
|
Cash
flows used in operating activities during the three months ended September 30,
2010 amounted to $15,203, representing a decrease of $158,948 or 91%, as
compared with cash flows provided by operating activities of $174,151 during the
three months ended September 30, 2009. The decrease in cash flows from operating
activities was primarily due to the Company’s lack of business operations during
the quarter ended September 30, 2010.
Cash
flows provided by investing activities was $6,000 during the three months ended
September 30, 2010, which represented an increase of $731,515 or 101%, as
compared to cash flows used in investing activities of $725,515 during the three
months ended September 30, 2009. This increase was primarily due to cash
proceeds from the exercise of options during the period ended September 30, 2010
and a large payment on an acquisition of software made during the period ended
September 30, 2009.
Cash
flows provided by financing activities was $110,998 during the three months
ended September 30, 2010, which represented an increase of $110,998 or 100%, as
compared to $0 during the three months ended September 30, 2009. This increase
was primarily due to the receipt of a short-term loan from a third party, which
was guaranteed by our Chief Executive Officer and Chairman of the Board, Mr.
Wang Zhenyu.
Liquidity
The
Company’s primary source of liquidity has been from advances from our Chief
Executive Officer and Chairman of the Board, Mr. Wang Zhenyu, and a short-term
loan from a third party, which was guaranteed by Mr. Wang Zhenyu. For
the year ended June 30, 2010, the Company’s primary liquidity requirements were
for the settlement of recurrent and accrued expenses of the Company, including
audit fees, legal and professional fees, rental, salaries and other
administrative expenses.
As of
September 30, 2010, the Company had approximately $115,711 in cash and cash
equivalents. Since the Company ceased all business operations, in
order for us to continue as a going concern, we hope to obtain necessary
financing by ways of capital injection from potential investors or debt
financing as well as seeking other growth opportunities by way of merger or
acquisition. There can be no assurance that we will be able to secure additional
funding or that, if we are successful in any of those actions, those actions
will produce adequate cash flow to enable us to meet all our future
obligations.
During
the current quarter, the Company’s subsidiary, Ever Trend Investment Limited,
entered into an unsecured short term loan agreement for $100,500 with an
unrelated party to meet the need of its day-to-day activities. The
short term loan bears an interest rate of 3% per annum matures on December 31,
2010. Mr. Wang Zhenyu, the Chairman and Chief Executive Officer of
the Company, provided a personal guarantee on this loan in the event of default
by Ever Trend Investment Limited. For the three months ended
September 30, 2010, the Company's primary liquidity requirements were for the
settlement of recurrent and accrued expenses of the Company, including audit
fees, legal and professional fees, rental, salaries and other administrative
expenses.
Related Party
Transactions
During
the quarter ended September 30, 2010, the Chairman and Chief Executive Officer
of the Company, Mr. Wang Zhenyu, made advances to the Company for working
capital purposes. At September 30, 2010 and 2009, the amount
outstanding was $414,098 and $253,501, respectively. As of November
8, 2010, the amount outstanding was $414,098. The outstanding amounts
are non-interest bearing, unsecured and have no fixed repayment
terms.
Taxation
$6,409 in
PRC income taxes payable at September 30, 2010, are due on April 30,
2011.
$2,289 in
PRC business tax payable at September 30, 2010 are due on September 30,
2010.
The
Company had no federal U.S. income taxes payable at September 30, 2010, as the
Company has an operating loss carried forward.
The
Company had an estimated $35,000 of state franchise tax payable on September 30,
2010, which was due on March 1, 2010.
Off-Balance
Sheet Arrangements
None.
FOR
THE YEAR ENDED JUNE 30, 2010 COMPARED TO YEAR ENDED JUNE 30, 2009
For
the Year Ended June 30, 2010 Compared To Year Ended June 30, 2009
Our
operating results are presented on a consolidated basis for the year ended June
30, 2010, as compared to the year ended June 30, 2009.
(Loss)
Income From Discontinued Operations, Net of Tax
During
the fiscal year ended June 30, 2010, the weak economic market resulted in a
significant decline in revenues of all areas of the Company’s
business. Based on this decline, the Company decided to wind down its
operations in June 2010. As of June 30, 2010, the Company had no
business operations and was considered a shell company. Upon
winding down all business operations in June 2010, the Company reclassified all
of its revenues and expenses as previously reported on its Statements of
Operations and Comprehensive Income (Loss), as a single item, “(Loss) Income
from Discontinued Operations, Net of Tax” for all periods presented in
accordance with U.S. GAAP.
The
Company had a loss from discontinued operations, net of tax of $20,742,887 and
income from discontinued operations, net of tax of $9,177,601 for the years
ended June 30, 2010 and 2009, respectively. The decrease in income
from operations, which were discontinued in June 2010, of $29,920,488 or 326%,
is due to the weak economic market that resulted in a significant decline in
revenues of all areas of the Company’s business, an impairment to software of
$9,290,464, an impairment to goodwill of $4,473,787 and the write-off of a
prepayment of $10,633,610. Due to winding down of operations, the
Company is not expected to realize the future benefits associated with these
assets.
Results
by Segment
As of
June 30, 2010, the Company had no operations and thus, only one
segment. All three of the segments as of June 30, 2009 (software
development, online insurance advertising and insurance agency) and their
corresponding revenues and expenses as previously reported on its Statements of
Operations and Comprehensive Income (Loss) have, as of June 30, 2010, been
reclassified as a single item, “(Loss) Income from Discontinued Operations, Net
of Tax” for all periods presented in accordance with U.S. GAAP. See
“(Loss) Income From Discontinued Operations, Net of Tax above.”
Material
Commitments
The
Company occupies office space leased from third parties. For the
years ended June 30, 2010 and 2009, the Company recorded $98,163 and $182,529,
respectively, as rental expense for such office space. As of June 30,
2010, the Company has outstanding commitments with respect to non-cancelable
operating leases as follows:
|
Year
Ending June 30,
|
|
Amount
|
|
|
2011
|
|
$
|
18,506
|
|
This
decrease is due to a reduction of office space in the current location and also
reduction in the number of offices during the year ended June 30,
2010.
|
(b)
|
Purchase
of Electronic Products
|
As of
June 30, 2010 and 2009, the Company has outstanding commitments with respect to
the purchase of electronic products of $0 and $8,079,748,
respectively.
The
decrease is due to re-negotiating and cancelling these agreements with our
outside vendors, owing to the disposal of subsidiary, which is the contracted
party of the agreements.
As of
June 30, 2010 and 2009, the Company had outstanding commitments with respect to
the purchase of software of $0 and $731,861, respectively. The
decrease is due to the Company’s payment of the outstanding amount with respect
to the purchase of such software.
Liquidity
and Capital Resources
Cashflow
As of
June 30, 2010, the Company had $92,094
in bank deposits with a
bank in China, which comprised 80.8% of its total cash and cash equivalent as of
such date.
Below is
a summary our Statement of Cashflow for the years ended June 30, 2010 and
2009:
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(547,775
|
)
|
|
$
|
8,990,006
|
|
|
$
|
(9,537,781
|
)
|
|
|
(106
|
)%
|
|
Investing
activities
|
|
|
(721,452
|
)
|
|
|
(12,397,762
|
)
|
|
|
(11,676,310
|
)
|
|
|
(94
|
)%
|
|
Financing
activities
|
|
|
150,094
|
|
|
|
71,455
|
|
|
|
78,639
|
|
|
|
110
|
%
|
|
Net
change in cash and cash equivalents
|
|
|
(1,119,133
|
)
|
|
|
(3,336,301
|
)
|
|
|
(2,217,168
|
)
|
|
|
(66
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(5,858
|
)
|
|
|
(14,467
|
)
|
|
|
(8,609
|
)
|
|
|
(60
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
1,217,085
|
|
|
|
4,567,853
|
|
|
|
(3,350,768
|
)
|
|
|
(73
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
92,094
|
|
|
$
|
1,217,085
|
|
|
$
|
(1,124,991
|
)
|
|
|
(92
|
)%
|
Cash
flows used in operating activities during the year ended June 30, 2010 amounted
to $547,775, representing a decrease in cash used of $9,537,781 or 106%, as
compared with cash flows provided by operating activities of $8,990,006 during
the year ended June 30, 2009. The decrease in cash flows from operating
activities was primarily due to the Company’s declining business operations
during the year and winding down during June 2010.
Cash
flows used in investing activities was $721,452 during the year ended June 30,
2010, which represented a decrease of $11,676,310 or 94%, as compared to
$12,297,762 during the year ended June 30, 2009. This decrease was primarily due
to a large payment on a software acquisition made in the prior
year.
Cash
flows provided by financing activities was $150,094 during the year ended June
30, 2010, which represented an increase of $78,639 or 110%, as compared to
$71,455 during the year ended June 30, 2009. This increase was primarily due to
advances from our Chief Executive Officer and Chairman of the Board, Mr. Wang
Zhenyu, and a short-term loan from a third party, which was guaranteed by Mr.
Wang Zhenyu.
Liquidity
The
Company’s primary source of liquidity has been from advances from our Chief
Executive Officer and Chairman of the Board, Mr. Wang Zhenyu, and a short-term
loan from a third party, which was guaranteed by Mr. Wang Zhenyu. For
the year ended June 30, 2010, the Company’s primary liquidity requirements were
for the settlement of recurrent and accrued expenses of the Company, including
audit fees, legal and professional fees, rental, salaries and other
administrative expenses.
On June
30, 2010, our cash and cash equivalents were $92,094. Management anticipates
that additional sources of capital beyond those currently available to it may be
required to continue the existence of the Company. We do not believe
our capital is sufficient to satisfy our cash requirements for the next twelve
months. We will continue to evaluate alternative sources of capital to meet our
cash requirements, including debt financing. There can be no assurance, however,
that any contemplated financing arrangements will be available and can be
obtained on terms favorable to us.
Related
Party Transactions
During
the years ended June 30, 2010 and 2009, the Chairman of the Company, Mr. Wang
Zhenyu, made advances to the Company for working capital purposes. At
June 30, 2010 and 2009, the amount outstanding was $403,600 and $253,506,
respectively. As of September 30, 2010, the amount outstanding was
$317,506. The outstanding amounts are non-interest bearing, unsecured
and have no fixed repayment terms.
Taxation
$6,305 in
PRC income taxes payable at June 30, 2010, which is due on April 30,
2011.
$2,347 in
PRC business tax payable at June 30, 2010, which is due on September 30,
2010.
The
Company had no federal U.S. income taxes payable at June 30, 2010, as the
Company has an operating loss carried forward.
The
Company had an estimated $35,000 of state franchise tax payable on June 30,
2010, which was due on March 1, 2010.
Off-balance
Sheet Arrangements
None.
FOR
THE YEAR ENDED JUNE 30, 2009 COMPARED TO YEAR ENDED JUNE 30, 2008
Our
operating results are presented on a consolidated basis for the year ended June
30, 2009, as compared to the year ended June 30, 2008.
The
following table sets forth the amounts and the percentage relationship to
revenues of certain items in our consolidated statements of income for the years
ended June 30, 2009 and 2008:
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
18,475,108
|
|
|
|
103
|
%
|
|
$
|
14,040,062
|
|
|
|
102
|
%
|
|
$
|
4,435,046
|
|
|
|
32
|
%
|
|
DISCOUNT
ALLOWED
|
|
|
498,579
|
|
|
|
3
|
%
|
|
|
304,686
|
|
|
|
2
|
%
|
|
|
193,893
|
|
|
|
64
|
%
|
|
REVENUES,
NET
|
|
|
17,976,529
|
|
|
|
100
|
%
|
|
|
13,735,376
|
|
|
|
100
|
%
|
|
|
4,241,153
|
|
|
|
31
|
%
|
|
COST
OF SALES
|
|
|
2,133,169
|
|
|
|
12
|
%
|
|
|
1,313,582
|
|
|
|
10
|
%
|
|
|
819,587
|
|
|
|
62
|
%
|
|
GROSS
PROFIT
|
|
|
15,843,360
|
|
|
|
88
|
%
|
|
|
12,421,794
|
|
|
|
90
|
%
|
|
|
3,421,566
|
|
|
|
28
|
%
|
|
Selling
expenses
|
|
|
281,540
|
|
|
|
2
|
%
|
|
|
167,903
|
|
|
|
1
|
%
|
|
|
113,637
|
|
|
|
68
|
%
|
|
Advertising
expenses
|
|
|
1,912,725
|
|
|
|
11
|
%
|
|
|
962,160
|
|
|
|
7
|
%
|
|
|
950,565
|
|
|
|
99
|
%
|
|
General
and administrative expenses
|
|
|
1,311,384
|
|
|
|
7
|
%
|
|
|
808,432
|
|
|
|
6
|
%
|
|
|
502,952
|
|
|
|
62
|
%
|
|
OPERATING
INCOME
|
|
|
12,337,711
|
|
|
|
68
|
%
|
|
|
10,483,299
|
|
|
|
76
|
%
|
|
|
1,854,412
|
|
|
|
18
|
%
|
|
Interest
income, net
|
|
|
24,718
|
|
|
|
0
|
%
|
|
|
19,904
|
|
|
|
0
|
%
|
|
|
4,814
|
|
|
|
24
|
%
|
|
INCOME
BEFORE TAXES
|
|
|
12,362,429
|
|
|
|
68
|
%
|
|
|
10,503,203
|
|
|
|
76
|
%
|
|
|
1,859,226
|
|
|
|
18
|
%
|
|
Income
tax
|
|
|
3,184,828
|
|
|
|
18
|
%
|
|
|
2,166,846
|
|
|
|
16
|
%
|
|
|
1,017,982
|
|
|
|
47
|
%
|
|
NET
INCOME
|
|
$
|
9,177,601
|
|
|
|
50
|
%
|
|
$
|
8,336,357
|
|
|
|
60
|
%
|
|
$
|
841,244
|
|
|
|
10
|
%
|
Revenues
The
Company’s consolidated revenues were $18,475,108, which represents a $4,435,046
or 32% increase from $14,040,062 for the year ended June 30, 2008. This increase
was the result of the increase completion of software development projects
during the year ended June 30, 2009.
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
development
|
|
$
|
6,511,545
|
|
|
|
35
|
%
|
|
$
|
4,298,739
|
|
|
|
31
|
%
|
|
$
|
2,212,806
|
|
|
|
51
|
%
|
|
Online
insurance advertising
|
|
|
11,244,559
|
|
|
|
61
|
%
|
|
|
9,432,393
|
|
|
|
67
|
%
|
|
|
1,812,166
|
|
|
|
19
|
%
|
|
Insurance
agency
|
|
|
510,332
|
|
|
|
3
|
%
|
|
|
308,930
|
|
|
|
2
|
%
|
|
|
201,402
|
|
|
|
65
|
%
|
|
Others
|
|
|
208,672
|
|
|
|
1
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
208,672
|
|
|
|
100
|
%
|
|
Total
Revenue
|
|
$
|
18,475,108
|
|
|
|
100
|
%
|
|
$
|
14,040,062
|
|
|
|
100
|
%
|
|
$
|
4,435,046
|
|
|
|
32
|
%
|
The
online insurance advertising revenue increased by 19% or $1,812,166 to
$11,244,559 for the year ended June 30, 2009 from $9,432,393 for the year ended
June 30, 2008. This increase was the result of an increase in the
number of insurance agents that placed advertisements on the Company’s
website.
The
increase in software development projects during the year ended June 30, 2009 of
51% or $2,212,806 compared to the year ended June 30, 2008 was due to the
completion of four large software development projects during the year ended
June 30, 2009.
Revenue
from our insurance agency services experienced an increase by $201,402 or 65%,
to $510,332 for the year ended June 30, 2009 from $308,930 for the same period
of 2008. This is mainly the result of the acquisition of GHIA on
October 28, 2009.
Other
revenue represents the rental income and gain on disposal of fixed assets for
the ZBDT office for the year ended June 30, 2009 to a related party, Beijing
Enterprises UniCard Co Ltd ("
UniCard
"), over which Mr. Zhengyu
Wang, the Chairman of the Company is also the Chairman of the
Board.
Cost
of Sales
The
Company’s consolidated cost of sales (“
COS
”) increased
$819,587 or 62% to $2,133,169 or 12% of net revenues for the year ended June 30,
2009, from $1,313,582 or 10% of net revenues for the year ended June 30, 2008.
The increase in COS is attributed to the significant increase in amortization of
$440,011 or 100% for the year ended June 30, 2009. Besides, there was
also an increase of business tax and levies of $228,360 or 19%, to $1,409,331
for the year ended June 30, 2009, from $1,180,971 for the year ended June 30,
2008. Amortization of the software system increased significantly
which resulted from its reclassification from G&A expenses in
accordance with the application of the software for revenue earning activities
for the year ended June 30, 2009.
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
tax and levies
|
|
$
|
1,409,331
|
|
|
|
66
|
%
|
|
$
|
1,180,971
|
|
|
|
90
|
%
|
|
$
|
228,360
|
|
|
|
19
|
%
|
|
Salaries
and allowances
|
|
|
141,251
|
|
|
|
6
|
%
|
|
|
104,967
|
|
|
|
8
|
%
|
|
|
36,284
|
|
|
|
35
|
%
|
|
Depreciation
|
|
|
12,911
|
|
|
|
1
|
%
|
|
|
6,374
|
|
|
|
0
|
%
|
|
|
6,537
|
|
|
|
103
|
%
|
|
Amortization
|
|
|
440,011
|
|
|
|
21
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
440,011
|
|
|
|
100
|
%
|
|
Other
|
|
|
129,665
|
|
|
|
6
|
%
|
|
|
21,270
|
|
|
|
2
|
%
|
|
|
108,395
|
|
|
|
510
|
%
|
|
Total
Cost of Sales
|
|
$
|
2,133,169
|
|
|
|
100
|
%
|
|
$
|
1,313,582
|
|
|
|
100
|
%
|
|
$
|
819,587
|
|
|
|
62
|
%
|
Gross
Profit
The
Company’s consolidated gross profit increased by $3,421,566 or 28% to
$15,843,360 for the year ended June 30, 2009 from $12,421,794 for the year ended
June 30, 2008. The increase in gross profit is attributable to the
increase in revenues from software development.
Selling
Expenses
Selling
expenses were $281,540 or 2% of net revenues for the year ended June 30, 2009,
as compared to $167,903 or 1% of net revenues for the year ended June 30, 2008.
The increase is attributable to expenses in the growth of operations due to the
acquisition of the insurance agency company, GHIA, in October 2008.
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and allowances
|
|
$
|
245,852
|
|
|
|
87
|
%
|
|
$
|
130,227
|
|
|
|
78
|
%
|
|
$
|
115,625
|
|
|
|
89
|
%
|
|
Depreciation
|
|
|
2,753
|
|
|
|
1
|
%
|
|
|
1,211
|
|
|
|
1
|
%
|
|
|
1,542
|
|
|
|
127
|
%
|
|
Office
expenses
|
|
|
17,142
|
|
|
|
6
|
%
|
|
|
3,705
|
|
|
|
2
|
%
|
|
|
13,437
|
|
|
|
363
|
%
|
|
Other
|
|
|
15,793
|
|
|
|
6
|
%
|
|
|
32,760
|
|
|
|
19
|
%
|
|
|
(16,967
|
)
|
|
|
(52
|
)%
|
|
|
|
$
|
281,540
|
|
|
|
100
|
%
|
|
$
|
167,903
|
|
|
|
100
|
%
|
|
$
|
113,637
|
|
|
|
67
|
%
|
Salaries
and allowances are a major component of selling expenses, which increased by 89%
or $115,625 for the year ended June 30, 2009 to $245,852 from $130,227 for the
year ended June 30, 2008. The increase is attributed to the increase
in staff members providing customer service and support in accordance with the
growth of the Company due to the acquisition of GHIA.
Advertising
Expenses
Advertising
expenses were $1,912,725 or 11% of net revenues for the year ended June 30,
2009, as compared to $962,160 or 7% of net revenues for the year ended June 30,
2008. The increase is $950,565 or 99%, which is attributable to duration of the
advertising, which lasted for 6 months and 2 months for the years ended June 30,
2009 and 2008, respectively.
General
and Administrative Expenses
General
and administrative (“
G&A
”)
expenses were $1,311,384 or 7% of our net revenue for the year ended June 30,
2009, as compared to $808,432 or 6% of net revenues for the year ended June 30,
2008. The increase was mainly attributable to the increase of salaries and
allowance after the acquisition of GHIA.
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and allowances
|
|
$
|
344,981
|
|
|
|
26
|
%
|
|
$
|
172,005
|
|
|
|
21
|
%
|
|
$
|
172,976
|
|
|
|
101
|
%
|
|
Rental
|
|
|
182,529
|
|
|
|
14
|
%
|
|
|
132,739
|
|
|
|
16
|
%
|
|
|
49,790
|
|
|
|
38
|
%
|
|
Building
management fee
|
|
|
3,083
|
|
|
|
0
|
%
|
|
|
19,649
|
|
|
|
2
|
%
|
|
|
(16,566
|
)
|
|
|
(84
|
)%
|
|
Depreciation
|
|
|
91,328
|
|
|
|
7
|
%
|
|
|
53,563
|
|
|
|
7
|
%
|
|
|
37,765
|
|
|
|
71
|
%
|
|
Amortization
|
|
|
0
|
|
|
|
0
|
%
|
|
|
134,342
|
|
|
|
17
|
%
|
|
|
(134,342
|
)
|
|
|
(100
|
)%
|
|
Travel
& accommodations
|
|
|
180,173
|
|
|
|
14
|
%
|
|
|
80,395
|
|
|
|
10
|
%
|
|
|
99,778
|
|
|
|
124
|
%
|
|
Legal
& professional fees
|
|
|
158,002
|
|
|
|
12
|
%
|
|
|
41,345
|
|
|
|
5
|
%
|
|
|
116,657
|
|
|
|
282
|
%
|
|
Allowance
for doubtful accounts
|
|
|
26,397
|
|
|
|
2
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
26,397
|
|
|
|
100
|
%
|
|
Other
|
|
|
324,891
|
|
|
|
25
|
%
|
|
|
174,394
|
|
|
|
22
|
%
|
|
|
150,497
|
|
|
|
86
|
%
|
|
|
|
$
|
1,311,384
|
|
|
|
100
|
%
|
|
$
|
808,432
|
|
|
|
100
|
%
|
|
$
|
502,952
|
|
|
|
62
|
%
|
The major
component of G&A expense is salaries and allowances, which were 26% and 21%
of total G&A expenses for the year ended June 30, 2009 and 2008,
respectively. The salaries and allowances increased by
101% or $172,976 for the year ended June 30, 2009, which was caused by the
expansion of our operations.
Rental
expense also increased by 38% or $49,790, to $182,529 for the year ended June
30, 2009 from $132,739 for the same period last year. This increase
resulted from the acquisition of GHIA on October 28, 2009 which included a
separate office for operations.
Amortization
of the software system was reduced significantly due to the reclassification
into COS in accordance with the application of the software for revenue earning
activities for the year ended June 30, 2009.
There was
an allowance for doubtful accounts of $26,397 and $0 for the years ended June
30, 2009 and 2008, respectively.
Interest
Income, net
Net
interest income for the year ended June 30, 2009 was $24,718, which represents a
24% or $4,814 increase from $19,904 of net interest income for the year ended
June 30, 2008. The increase was the result of the increase in cash flow before
the completion of acquisition of GHIA.
Income
Taxes
Income
taxes increased by $1,017,982 or 47% to $3,184,828 for the year ended June 30,
2009 from $2,166,846 for the year ended June 30, 2008. The increase
is attributed to the increase of the operating income of the subsidiary, ZBDT,
which was subject to a corporate income tax rate of 25%, and ZYTX which was
subject to a corporate income tax rate at 15%, for the year ended June 30,
2009.
Net
Income
The net
income of the Company for year ended June 30, 2009 increased 10% or $841,244 to
$9,177,601 from net income of $8,336,357 for the year ended June 30, 2008. This
increase is attributed to the increase of software development revenue of
$2,212,806 during the year ended June 30, 2009.
Results
by Segment
The
Company has determined that there are three (3) reportable business segments for
the years ended June 30, 2009 and 2008, which are software development, online
insurance advertising and insurance agency within the PRC.
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
|
6,511,545
|
|
|
|
100
|
%
|
|
|
4,298,739
|
|
|
|
100
|
%
|
|
|
2,212,806
|
|
|
|
51
|
%
|
|
COS
|
|
|
115,509
|
|
|
|
2
|
%
|
|
|
94,502
|
|
|
|
2
|
%
|
|
|
21,007
|
|
|
|
22
|
%
|
|
Gross
profit
|
|
|
6,396,036
|
|
|
|
98
|
%
|
|
|
4,204,237
|
|
|
|
98
|
%
|
|
|
2,191,799
|
|
|
|
52
|
%
|
Revenues
from software development increased by 51% or $2,212,806 to $6,511,545 for the
year ended June 30, 2009 from $4,298,739 for the year ended June 30,
2008. The increase is attributable to the completion of four large
projects during the year ended June 30, 2009.
Gross
profit increased to $6,396,036 for the year ended June 30, 2009 resulting from
increase in revenue. Details of COS are summarized as
below:
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and allowances
|
|
$
|
97,029
|
|
|
|
84
|
%
|
|
$
|
71,345
|
|
|
|
76
|
%
|
|
$
|
25,684
|
|
|
|
36
|
%
|
|
Depreciation
|
|
|
5,944
|
|
|
|
5
|
%
|
|
|
5,694
|
|
|
|
6
|
%
|
|
|
250
|
|
|
|
4
|
%
|
|
Other
|
|
|
12,536
|
|
|
|
11
|
%
|
|
|
17,463
|
|
|
|
18
|
%
|
|
|
(4,927
|
)
|
|
|
(28
|
)%
|
|
|
|
$
|
115,509
|
|
|
|
100
|
%
|
|
$
|
94,502
|
|
|
|
100
|
%
|
|
$
|
21,007
|
|
|
|
22
|
%
|
Similar
to the year ended June 30, 2008, salaries and allowances were still the major
components of COS for software development income. The salaries and
allowances increased by $25,684 or 36%, to $97,029 for the year ended June 30,
2009 as compared to $71,345 for the year ended June 30, 2008.
The
Software Development segment is the only segment not subject to business tax and
levies under existing PRC tax law. As a result, no business tax and
levy expenses were incurred.
|
(b)
|
Online Insurance
Advertising
|
|
|
2009
|
|
2008
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
11,244,559
|
|
|
|
100
|
%
|
|
$
|
9,432,393
|
|
|
|
100
|
%
|
|
$
|
1,812,166
|
|
|
|
19
|
%
|
|
COS
|
|
|
918,088
|
|
|
|
8
|
%
|
|
|
556,683
|
|
|
|
6
|
%
|
|
|
361,405
|
|
|
|
65
|
%
|
|
Gross
profit
|
|
$
|
10,326,471
|
|
|
|
92
|
%
|
|
$
|
8,875,710
|
|
|
|
94
|
%
|
|
$
|
1,450,761
|
|
|
|
16
|
%
|
Revenues
from online insurance advertising increased by 19% or $1,812,166 to $11,244,559
for the year ended June 30, 2009 from $9,432,393 for the year ended June 30,
2008. This increase is attributable to the number of existing
contracts with insurance agents that renewed their contracts with the
Company.
Meanwhile,
the Company maintained stable COS and GP ratios for both fiscal years ended June
30, 2009 and 2008.
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
tax and levies
|
|
$
|
614,194
|
|
|
|
67
|
%
|
|
$
|
518,782
|
|
|
|
93
|
%
|
|
$
|
95,412
|
|
|
|
18
|
%
|
|
Salaries
and allowances
|
|
|
44,222
|
|
|
|
4
|
%
|
|
|
33,622
|
|
|
|
6
|
%
|
|
|
10,600
|
|
|
|
32
|
%
|
|
Depreciation
|
|
|
6,967
|
|
|
|
1
|
%
|
|
|
472
|
|
|
|
0
|
%
|
|
|
6,495
|
|
|
|
1376
|
%
|
|
Amortization
|
|
|
234,346
|
|
|
|
26
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
234,346
|
|
|
|
100
|
%
|
|
Other
|
|
|
18,359
|
|
|
|
2
|
%
|
|
|
3,807
|
|
|
|
1
|
%
|
|
|
14,552
|
|
|
|
382
|
%
|
|
|
|
$
|
918,088
|
|
|
|
100
|
%
|
|
$
|
556,683
|
|
|
|
100
|
%
|
|
$
|
361,405
|
|
|
|
65
|
%
|
Similar
to the year ended June 30, 2008, business tax and levies were still the major
components of COS for online advertising income, which was 5.5% of our gross
revenue. Compared to the same period of the prior year. This increase
in business taxes and levies of 18% is attributable to the increase in revenue
of 19%.
Amortization
expense increased by $234,346 or 100%, to $234,346 for the year ended June
30, 2009 as compared to $0 for the year ended June 30, 2008, as the new software
used for online advertising was amortized.
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
510,331
|
|
|
|
4343
|
%
|
|
$
|
308,930
|
|
|
|
7279
|
%
|
|
$
|
201,401
|
|
|
|
65
|
%
|
|
Discount
allowed
|
|
|
498,579
|
|
|
|
4243
|
%
|
|
|
304,686
|
|
|
|
7179
|
%
|
|
|
193,893
|
|
|
|
64
|
%
|
|
Revenues,
net
|
|
|
11,752
|
|
|
|
100
|
%
|
|
|
4,244
|
|
|
|
100
|
%
|
|
|
7,508
|
|
|
|
177
|
%
|
|
COS
|
|
|
236,800
|
|
|
2015
|
%
|
|
|
17,298
|
|
|
|
408
|
%
|
|
|
219,502
|
|
|
|
1269
|
%
|
|
Gross
loss
|
|
$
|
(225,048
|
)
|
|
|
(1915
|
)%
|
|
$
|
(13,054
|
)
|
|
|
(308
|
)%
|
|
$
|
211,994
|
|
|
|
1624
|
%
|
Our
insurance agency revenue increased by 65% or $201,401, which is attributed to
the acquisition of GHIA and the insurance agency business
expansion.
Revenue
from our insurance agency business is also subject to business tax and
levies. The COS mainly consists of business tax and levies of 5.5% of
gross revenue net of returned commissions for cancelled policies, amounting to
$31,135 for the year ended June 30, 2009.
As the
income from our insurance agency business is developing, the COS and GP ratios
for both the year ended June 30, 2009 and 2008 fluctuate.
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
tax and levies
|
|
$
|
31,135
|
|
|
|
13
|
%
|
|
$
|
17,090
|
|
|
|
99
|
%
|
|
$
|
14,045
|
|
|
|
82
|
%
|
|
Salaries
and allowances
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
0
|
%
|
|
Depreciation
|
|
|
-
|
|
|
|
0
|
%
|
|
|
208
|
|
|
|
1
|
%
|
|
|
(208
|
)
|
|
|
(100
|
)%
|
|
Amortization
|
|
|
205,665
|
|
|
|
87
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
205,665
|
|
|
|
100
|
%
|
|
|
|
$
|
236,800
|
|
|
|
100
|
%
|
|
$
|
17,298
|
|
|
|
100
|
%
|
|
$
|
219,502
|
|
|
|
1269
|
%
|
Except
for the business tax and levies, amortization are a major component of COS for
year ended June 30, 2009 as the Company commenced to use the new application
software which was commenced to be amortized.
|
|
2009
|
|
2008
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
208,673
|
|
|
|
100
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
208,673
|
|
|
|
100
|
%
|
|
COS
|
|
|
862,772
|
|
|
|
413
|
%
|
|
|
645,099
|
|
|
|
100
|
%
|
|
|
217,673
|
|
|
|
34
|
%
|
|
Gross
loss
|
|
$
|
(654,099
|
)
|
|
|
(313
|
)%
|
|
$
|
(645,099
|
)
|
|
|
100
|
%
|
|
$
|
(9,000
|
)
|
|
|
1
|
%
|
Administration
revenue represented the inter-companies’ service income from ZYTX to ZBDT, which
was eliminated in consolidation. Revenue is mainly comprised of
rental income and net income from disposal of fixed assets of $131,758 and
$72,711, respectively, and the relevant cost for the rental income of
$113,198. However, under the relevant PRC tax laws, service income of
ZBDT was subject to business tax and levies of 5.5% on revenue, which was
recognized as a COS of administration.
Material
Commitments
The
Company occupies office space leased from third parties. For the
years ended June 30, 2009 and 2008, the Company recognized $182,529 and
$132,739, respectively, as rental expense for these spaces. As of
June 30, 2009, the Company has outstanding commitments with respect to
non-cancelable operating leases as follows:
|
Year Ending June 30,
|
|
Amount
|
|
|
2010
|
|
$
|
39,409
|
|
|
(b)
|
Purchase of Electronic
Products
|
As of
June 30, 2009, the Company has outstanding commitments with respect to the
purchase of electronic products of $8,079,748 (Rmb55,200,000) due within one
year as follows:
|
Payment Due Dates
|
|
Amount
|
|
|
|
|
|
|
|
On
or before July 20, 2009
|
|
$
|
2,810,347
|
|
|
On
or before October 20, 2009
|
|
|
2,634,700
|
|
|
On
or before January 20, 2010
|
|
|
1,902,839
|
|
|
On
or before April 20, 2010
|
|
|
731,862
|
|
|
|
|
$
|
8,079,748
|
|
|
Expected Product Delivery Dates
|
|
Units
|
|
|
|
|
|
|
|
October
20, 2009
|
|
|
20,000
|
|
|
December
20, 2009
|
|
|
10,000
|
|
|
March
20, 2010
|
|
|
10,000
|
|
|
|
|
|
40,000
|
|
As of
June 30, 2009, the Company has outstanding commitments with respect to the
purchase of software of $731,861 (Rmb5,000,000) due on July 19,
2009. Subsequent to the year end, the Company made the outstanding
payment accordingly. The software is expected to be installed and
fully tested in the first quarter of 2010.
Off-Balance
Sheet Arrangements
We
currently have no off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Liquidity
and Capital Resources
Cashflow
As of
June 30, 2009, the Company had $1,207,171
in bank deposits with a
bank in China, which constituted about 99.2% of its total cash and cash
equivalent as of such date.
We
summarize our Statement of Cashflow for the years ended June 30, 2009 and 2008
as below:
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
8,990,006
|
|
|
$
|
6,731,373
|
|
|
$
|
2,258,633
|
|
|
|
34
|
%
|
|
Investing
activities
|
|
|
(12,397,762
|
)
|
|
|
(3,096,239
|
)
|
|
|
(9,301,523
|
)
|
|
|
300
|
%
|
|
Financing
activities
|
|
|
71,455
|
|
|
|
153,069
|
|
|
|
(81,614
|
)
|
|
|
(53
|
)%
|
|
Net
change in cash and cash equivalents
|
|
|
(3,336,301
|
)
|
|
|
3,788,203
|
|
|
|
(7,124,504
|
)
|
|
|
(188
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(14,467
|
)
|
|
|
731,993
|
|
|
|
(746,460
|
)
|
|
|
(102
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
4,567,853
|
|
|
|
47,657
|
|
|
|
4,520,196
|
|
|
|
9485
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
1,217,085
|
|
|
$
|
4,567,853
|
|
|
$
|
(3,350,768
|
)
|
|
|
(73
|
)%
|
Cash
flows provided by operating activities during the year ended June 30, 2009
amounted to $8,990,006, representing an increase of $2,258,633 or 34%, as
compared with cash flows provided by operating activities of $6,731,373 during
the year ended June 30, 2008. The increase in cash flows from operating
activities was primarily due to increase of net revenues by $4,241,153 resulting
from the Company’s operating activities have been enhanced on both software
development and online insurance advertising.
Cash
flows used in investing activities was $12,397,762 during the year ended June
30, 2009, which represented an increase of $9,301,523 or 300%, as compared to
$3,096,239 at June 30, 2008. This increase is mainly attributed to
the acquisition of GHIA of $5,715,919, prepayment of software of $6,981,952
and collection of an advance to a former shareholder of GHIA of
$1,019,759.
For the
year ended June 30, 2009, the cash provided by financing activities was $71,455,
which represented an decrease of $81,614 or 53%, as compared to $153,069 for the
year ended June 30, 2008. The amount represented an advance from a director to
the Company for the operating expenses of the Company.
Liquidity
The
primary source of liquidity has been cash generated from operations, which
included cash inflows from currency translation activities. Historically, the
primary liquidity requirements were for capital expenditures, working capital
and investments. Our contractual obligations, commitments and debt service
requirements over the next 12 months are shown below.
Taxation
Of the
$6,260,070 of income taxes payable at June 30, 2009, $6,253,786 represents the
amount of income taxes payable by ZBDT. Of the $6,253,786 of income
taxes payable, $4,508,167 was due on April 30, 2009 and $1,745,619 is due on
April 30, 2010. The Company has been negotiating with the tax
authorities to defer the payment of CIT due on April 30, 2009 without interest
or penalties, and the Company is awaiting the final ruling from the tax
authorities.
Of the
$2,097,456 of business tax payable at June 30, 2009, $1,495,788 was due on April
30, 2009 and $601,668 is due on April 30, 2010. The Company has been
negotiating with the tax authorities to defer the payment of business tax due on
April 30, 2009 without interest or penalties, and the Company is awaiting the
final ruling from the tax authorities.
If the
response from the tax authorities is adverse, the Company may have a shortage of
working capital and need additional fund for maintain the
operations.
Commitments
As of
June 30, 2009, the Company has outstanding commitments with respect to the
purchase of electronic products of $8,079,748 (Rmb55,200,000) due within one
year and the details are stated in Material Commitments above.
If the
Company cannot fulfill this commitment on purchase of electronic products, it
would cause the loss on prepayments made.
Our
primary source of liquidity will continue to be cash generated from operations
as well as existing cash on hand. We may look for the credit facilities to
assist, if required, in meeting our working capital needs and other contractual
obligations.
Our
current cash and cash equivalents and cash generated from operations may not
satisfy our expected working capital and other requirements for the foreseeable
future based on our current business strategy and expansion plan. We believe we
will have available resources to meet our short-term liquidity
requirements.
As of
June 30, 2009, all of our capital is equity capital and we have not made any
debt financing with any bank or other financial institutions. We believe our
capital is sufficient to satisfy our cash requirements for the next twelve
months. As for our business development, the Company may consider raising
additional funds for the following future business plans if conditions are
suitable:
|
|
§
|
To expand our operations in
different cities in the PRC;
|
|
|
§
|
To acquire companies which would
add value to our business
expansion;
|
|
|
§
|
To expand our online insurance
sales supermarket; and
|
|
|
§
|
To acquire equipment to
continually upgrade the existing network portal hardware environment and
to strengthen its network security
inputs.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
On August
4, 2010 (the “
Dismissal Date
”), the
Company notified Weinberg & Company, P.A. (“
Weinberg
”) that it
was dismissing Weinberg as its independent registered public accounting firm,
effective immediately. The Board approved the dismissal of Weinberg as its
independent registered public accounting firm. Weinberg audited the
Company's financial statements for the fiscal years ended June 30, 2009 and 2008
and reviewed the subsequent interim quarters through the Dismissal
Date. Weinberg's reports on the Company's financial statements did
not contain an adverse opinion or a disclaimer of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope or accounting principles.
On August 5, 2010, the Company, with the Board's approval, engaged Friedman LLP
(“
Friedman
”) to
serve as its independent registered public accounting firm to audit the
Company’s consolidated financial statements for the fiscal year ended June 30,
2010 and to issue a report on the Company’s financial statements for such fiscal
year.
D
uring the Company’s most
recent two (2) fiscal years, as well as the subsequent interim period through
the Dismissal Date, there were no disagreements on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to the satisfaction of Weinberg
would have caused Weinberg to make reference in connection with its opinion to
the subject matter of the disagreement.
Aside
from the matter identified below, during the Company’s most recent two (2)
fiscal years, as well as the subsequent interim period through the Dismissal
Date, Weinberg did not advise the Company of any of the matters identified in
Item 304(a)(1)(v)(A) - (D) of Regulation S-K. During the most recent
two (2) fiscal years and during the subsequent interim period through the
Dismissal Date, there was one “reportable event,” as defined in Regulation S-K
Item 304(a)(1)(v). In performing the audit of the Company’s consolidated
financial statements for the fiscal year ended June 30, 2009, Weinberg advised
the Company’s management and the Board of Directors that it had identified the
following material weakness: there was a lack of sufficient accounting staff
which resulted in a lack of effective controls necessary for a good system of
internal control for financial reporting and there was a weakness in the
internal controls relating to the financial statement closing process which
resulted primarily from the fact that certain parts of the work of the Company’s
accounting staff may not be monitored or reviewed correctly. The material
weakness described above existed on June 30, 2009 and continued to exist as of
June 30, 2010. For a further discussion of the foregoing material
weakness please refer to Item 9A of the Company’s Annual Report on Form 10-K,
filed with the Commission on October 13, 2010.
DESCRIPTION
OF THE COMPANY’S COMMON STOCK
The
Company’s authorized capital stock currently consists of One Hundred Million
(100,000,000) shares of common stock, par value $0.001 per share, of which there
are 46,000,000 shares of common stock issued and outstanding. There are no
shares of preferred stock authorized, issued or outstanding. Holders of Common
Stock are entitled to one (1) vote for each share on all matters to be voted on
by the Company’s stockholders. Holders of Common Stock do not have cumulative
voting rights. Holders of Common Stock are entitled to share ratably in
dividends, if any, as may be declared from time to time by the Board in its
discretion from funds legally available therefore. In the event of any
liquidation, dissolution or winding up, the holders of Common Stock are entitled
to a pro-rata share of all assets remaining after payment in full of all
liabilities and preferential payments, if any, to holders of preferred stock.
Holders of Common Stock have no preemptive rights to purchase additional Common
Stock. Furthermore, there are no conversion or redemption rights or sinking fund
provisions with respect to the Common Stock.
Anti-Takeover
Effects of Provisions of Delaware Law
Provisions
of Delaware law could make the Acquisition of the Company through a tender
offer, a proxy contest or other means more difficult and could make the removal
of incumbent officers and directors more difficult. The Company expects these
provisions to discourage coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of the Company to first
negotiate with the Board. The Company believes that the benefits
provided by its ability to negotiate with the proponent of an unfriendly or
unsolicited proposal outweigh the disadvantages of discouraging these proposals.
The Company believes the negotiation of an unfriendly or unsolicited proposal
could result in an improvement of its terms.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth each person known by us to be the beneficial owner of
five (5%) percent or more of the Common Stock of the Company, all directors
individually and all directors and officers as a group as of December 6, 2010.
Each person named below has sole voting and investment power with respect to the
shares shown unless otherwise indicated.
|
Name and Address of
Beneficial Owner(1)
|
|
Amount of
Direct
Ownership
|
|
|
Amount of
Indirect
Ownership
|
|
|
Total
Beneficial
Ownership
|
|
|
Percentage of
Class(2)
|
|
|
Zhenyu
Wang, Chairman of the Board
|
|
|
16,008,960
|
|
|
|
-
|
|
|
|
16,008,960
|
|
|
|
34.8
|
%
|
|
Mingfei
Yang, Chief Financial Officer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Yuefeng
Wang, Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Yinan
Zhang, Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Xiaoshuang
Chen, Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Renbin
Yu, Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Yong
Bian, Director
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
All
directors and officers as a group (7 persons)
|
|
|
16,008,960
|
|
|
|
|
|
|
|
16,008,960
|
|
|
|
34.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yanling
Chen
Room 704, Zhenxing
District Yijing Street, 33# No.2,
Dandong
City, Liaoning Province, China
|
|
|
2,999,040
|
|
|
|
-
|
|
|
|
2,999,040
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junjun
Xu
|
|
|
5,280,000
|
|
|
|
-
|
|
|
|
5,280,000
|
|
|
|
11.5
|
%
|
|
Room
807, Block A, Ding Xiu Xin Yuan
No
1.Nanli Shiliu Yuan, Fengtai District
Beijing,
100075 , China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Unless
otherwise noted, each beneficial owner has the same address as the
Company.
(2) Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Under those rules and for purposes of the table above (a)
if a person has decision making power over either the voting or the disposition
of any shares, that person is generally deemed to be a beneficial owner of those
shares; (b) if two or more persons have decision making power over either the
voting or the disposition of any shares, they will be deemed to share beneficial
ownership of those shares, in which case the same shares will be included in
share ownership totals for each of those persons; and (c) if a person held
options to purchase shares that were exercisable on, or became exercisable
within 60 days of December 6, 2010, that person will be deemed to be the
beneficial owner of those shares and those shares (but not shares that are
subject to options held by any other stockholder) will be deemed to be
outstanding for purposes of computing the percentage of the outstanding shares
that are beneficially owned by that person.
INFORMATION
ABOUT DING NENG HOLDINGS
Ding Neng
Holdings, a British Virgin Islands business company, acts as a holding company
and indirectly controls Ding Neng Bio-tech, a Chinese variable interest
entity. Ding Neng Holdings’ sole source of income and operations is
through its indirect, contractual relationship with Ding Neng
Bio-tech.
Based in
the city of Zhangzhou, Fujian Province, China, Ding Neng Bio-tech is principally
engaged in the production, refinement and distribution of biodiesel
fuel. Ding Neng Bio-tech has approximately 84 full-time
employees. It operates a biodiesel manufacturing facility in
Zhangzhou city, the annual aggregate capacity of which has increased from
approximately 20,000 tons in 2009 to approximately 40,000 tons in
2010. Ding Neng Bio-tech believes its rapid growth in recent years
has been supported by the continuing expansion of the market for biodiesel in
the PRC. According to China Commodities Daily, this market is
forecasted to reach 1 million tons in 2010, which is 20% more than the expected
domestic biodiesel production volume in the PRC.
Currently
the raw materials used in Ding Neng Bio-tech’s production of biodiesel are
refined animal fats and crude and refined vegetable oils. The
multi-feedstock technology employed in its biodiesel production process enables
it to utilize different feedstocks based on availability and price. Ding Neng
Bio-tech is in the process of acquiring a 1000mu (approximately 165 acres)
Sapindus plantation located in Zhejiang Province. Ding Neng Bio-tech
expects to use it to develop 165 acres of Sapindus forest in the next 5-8 years,
which is expected to provide one-third of the total feedstock required for its
biodiesel production through 2013.
Ding Neng
Bio-tech currently markets its products to various oil companies located in
Fujian province.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Ding Neng
Holdings prepared the following discussion and analysis to help you better
understand its financial condition, changes in its financial condition, and
results of operations for the fiscal years ended December 31, 2009 and
2008, and the nine month periods ended September 30, 2010 and
2009. This discussion should be read in conjunction with the
financial statements and related notes for Ding Neng Holdings for the fiscal
years ended December 31, 2009 and 2008 and the unaudited financial statements
and related notes for the nine month periods ended September 30, 2010 and
2009.
Cautionary
Statements Regarding Forward Looking Statements
Some of
the information in this section contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue," or similar words. You should read statements that
contain these words carefully because they:
● discuss
future expectations;
● contain
projections of future results of operations or of financial condition;
and
● state
other "forward-looking" information.
Ding Neng
Holdings believes it is important to communicate its expectations. However, it
undertakes no duty to update any forward-looking statements contained herein,
even though its situation may materially change in the future. There may be
events in the future that Ding Neng Holdings is not able to accurately predict
or over which it has no control. Ding Neng Holdings’ actual results
and the timing of certain events could differ materially from those anticipated
in these forward-looking statements as a result of numerous factors, many of
which are beyond its control.
Business
Overview
Ding Neng
Bio-tech, the sole operating entity of Ding Neng Holdings, is in the business of
the production, refinement and distribution of bio-diesel fuel from animal oil,
plant oil and other various sources and receives revenues from the sales of
biodiesel and crude biodiesel products. Ding Neng Bio-tech’s
production capacity doubled in 2009 comparable to 2008, which resulted in an
increase in revenues and profits. Ding Neng Bio-tech seeks to expand
its production capabilities in 2011 in an attempt to further increase its
revenues and profits.
Ding Neng
Bio-tech’s operating results are largely driven by the price at which it can
sell its biodiesel, the cost of feedstock and its operating
costs. Revenues are generally impacted by such factors as the
available supply and demand for biodiesel, the price of diesel fuel (with which
biodiesel prices often correlate), general economic conditions, weather, the
competitive nature of the industry, the extensive environmental laws that
regulate the industry, new legislation at the national, province or local level
and changes in national biodiesel tax incentives.
The
primary components of cost of goods sold from the production of biodiesel are
feedstock (primarily animal fats and plant oil) and other raw materials
(methanol and other chemicals), freight, energy (coal, water and electricity),
labor and depreciation on process equipment. The cost of feedstock is the
largest single component of the cost of biodiesel production, typically
accounting for approximately 88% of the overall cost of producing biodiesel.
Changes in the price or supply of feedstock are subject to and determined by
market forces and other factors over which Ding Neng Bio-tech has no control,
including government policies and economic trends. Although Ding Neng Bio-tech
has taken some action to pass price fluctuations on to suppliers, it still
experienced a large variation in the cost of feedstock.
Ding Neng
Holdings expects to fund the operations of Ding Neng Bio-tech during the next
twelve months using cash flows from continuing operations and financing from the
capital markets. Management is directing its efforts toward
increasing production and operating efficiencies while maintaining or decreasing
operating costs. For the fiscal year 2009, Ding Neng Bio-tech increased its
production output rate from approximately 85% in 2008 to approximately
90%. Ding Neng Bio-tech seeks to reduce feedstock costs by continuing
to produce biodiesel from less-costly feedstocks, such as animal fat and cooked
oil.
Since
inception, Ding Neng Bio-tech has produced biodiesel on an as-ordered
basis. This helps to insure that production does not significantly
exceed orders on hand and keeps inventory and warehousing costs
down.
Although
Ding Neng Bio-tech has historically experienced lower demand before and during
the Chinese Spring Festival month (normally in January or February), there is no
other seasonal demand fluctuation throughout the year.
Organization
and Basis of Presentation
The
consolidated financial statements consist of the financial statements of Ding
Neng Holdings, DBT, Fuhua and Ding Neng Bio-tech. Ding Neng Holdings’
sole source of income and operations is through their indirect, contractual
(variable interest entity) relationship with Ding Neng Bio-tech.
Critical
Accounting Policies
The
accompanying consolidated financial statements have been prepared by Ding Neng
Holdings in accordance with accounting principles generally accepted in the
United States of America. The consolidated financial statements
include the accounts of Ding Neng Holdings and its subsidiaries and variable
interest entity. All significant inter-company balances and
transactions have been eliminated in consolidation including those of its
variable interest entity.
It is
expected that the Acquisition will be accounted for as a common
control transaction and a recapitalization of the subsidiaries with retroactive
effect in the accompanying financial statements. The financial statements have
been prepared as if the existing corporate structure had been in existence
throughout all periods and the reorganization had occurred as of the beginning
of the earliest period presented in the accompanying financial
statements.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. (“GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Future results could be materially affected if actual results
were to differ from these estimates and assumptions.
Revenue
Recognition Policies
Ding Neng
Holdings recognizes revenue net of value added tax (VAT) when persuasive
evidence of an arrangement exists, delivery of the goods has occurred, customer
acceptance has been obtained (which means the significant risks and ownership
have been transferred to the customer), the price is fixed or determinable and
collectability is reasonably assured. No return allowance is made as products
returns are insignificant based on historical experience. Costs of distributing
products to Ding Neng Bio-tech’s customers are included in selling
expenses.
Results
of Operations
TWELVE
MONTHS ENDED DECEMBER 31, 2009 COMPARED WITH TWELVE MONTHS ENDED DECEMBER 31,
2008
Revenue
Ding Neng
Holdings’ total revenue increased by $6,251,066 or approximately 69%, from
$9,038,313 in the twelve months ended December 31, 2008 to $15,289,379 in the
twelve months ended December 31, 2009. This increase was primarily attributable
to significant increased sales volume of biodiesel. Revenue in 2008
was entirely attributable to the biodiesel, while in 2009 biodiesel revenue
increased by $4,949,646 to $13,987,959. Another production, called crude
(or unrectified) biodiesel, produced revenue of $1,301,420, representing
approximately 9% of total revenue for the twelve months ended December 31,
2009.
Cost
of Revenue
Overall
cost of revenue increased by $4,909,507 or approximately 66%, from $7,389,447 in
the twelve months ending December 31, 2008, to $12,298,954 for the twelve months
ending December 31, 2009. This increase was primarily caused by the significant
increase in production volume and increased transportation costs due to the
increase in revenue. Total biodiesel production cost increased by
$3,904,611 or approximately 53% from $7,389,447 in 2008 to $11,294,058 in 2009.
The freight-in cost increased to $410,699 in 2009, comparable to $62,077 in
2008. This is due to the significant increase revenue.
The
difference between revenue increase percentage and overall cost increase
percentage is approximately 3%. This is attributable to improving production
techniques and a stable purchase price for Ding Neng Bio-tech’s
products. Techniques and systems improvements contributed to the
increased production efficiency.
Selling
Expenses
Selling
expenses increased by $146,182 or approximately 140% to $250,426 for the twelve
months ended December 31, 2009 compared to $104,244 for the same period in
2008. Below is a description of Ding Neng Holdings’ selling
expenses.
|
Description
|
|
2009
|
|
|
2008
|
|
|
Business
taxes
|
|
$
|
5,905
|
|
|
$
|
3,103
|
|
|
Freight
– Outbound
|
|
$
|
197,347
|
|
|
$
|
87,074
|
|
|
Salaries
- sales
|
|
$
|
20,254
|
|
|
$
|
11,120
|
|
|
Port
storage fee
|
|
$
|
26,920
|
|
|
$
|
2,947
|
|
|
Subtotal
|
|
$
|
250,426
|
|
|
$
|
104,244
|
|
In
parallel with the increase in sales revenue, both outbound freight and port
storage costs increased significantly as well. Ding Neng Bio-tech has
only 3 employees in sales, consistent with its strategy to seek large, long-term
customers rather than trying to develop a large number of small
customers. Much of its time and resources is spent on research and
development to improve production quality.
Research
and Development Expenses
Ding Neng
Holdings’ research and development expenses increased by $333,014 or
approximately 149% to $556,071 for the twelve months ended December 31, 2009
from $223,057 for the twelve months ended December 31, 2008. Production capacity
was 10,000 tons in 2008 and increased to 20,000 tons in 2009 without doubling
production facilities or equipment purchases. The major contribution to
increased production came from system redesign and technology improvements,
which required additional equipment, raw materials and technical support
personnel. Certain technical personnel come from outside institutions or
consulting companies, others are employees from Ding Neng Bio-tech’s research
and investigation department. Ding Neng Holdings expects expenditures
on research and development to increase year by year in the future.
General
and Administrative Expenses
General
and administrative expenses increased by $83,044 or approximately 81% to
$185,394 for the twelve months ended December 31, 2009, from $102,350 for the
twelve months ended December 31, 2008. This represented only 1% of
total revenues in both 2008 and 2009. A majority of the general and
administrative expenses were employee wages and benefits.
Wage and
benefits expenses increased by $52,042 or approximately 70% to $126,019 in the
twelve months ended December 31, 2009 from $73,977 in the twelve months ended
December 31, 2008.
Interest
Expense
Interest
income increased $1,621 or approximately 148% to $2,721 for the twelve months
ended December 31, 2009 from $1,100 for the twelve months ended December 31,
2008. This was due to increased cash on hand and increased interest
rates.
Net
Income
Net
income increased by $836,618 or approximately 69% to $2,056,593 for the twelve
months ended December 31, 2009 from $1,219,975 for the twelve months ended
December 31, 2008. The increase is primarily due to the increased sales in 2009,
as discussed above.
Liquidity
and Capital Resources
Net cash
provided by operating activities was $1,385,966 for the twelve months ended
December 31, 2009 compared to net cash outflow of $1,054,563 for the twelve
months ended December 31, 2008.
Net cash
used in investing activities was $1,248,921 for the twelve month period ended
December 31, 2009, representing a prepayment of $1,220,690 for a long-term
capital investment and a small purchase of $28,231 of property and equipment,
compared to $0 for the twelve months ended December 31, 2008. In
2009, Ding Neng Bio-tech entered into a purchase contract with TianTai County
Manyuanchun Agricultural Development Co., Ltd (“TianTai”), which is located in
Zhejiang province. Tiantai is owned, in part, by Mr. Sanfu Huang,
Ding Neng Holdings’ CEO and a director. See “Certain Relationships
and Related Party Transactions”. Ding Neng Holdings expects to spend
$2,932,200 acquiring 165 acres of forest land use rights and Sapindus forest
where there are more than 50,000 6-8 year old “mother trees”. They
are called “Sapindus”. It is a natural raw material for producing detergent, and
the core of Sapindus is good raw material for producing biodiesel. In
parallel with Ding Neng Bio-tech’s anticipated production capacity increase, it
will need to purchase more raw oil to support the increase in
output. Ding Neng Bio-tech believes the trees owned by TianTai
provide the best seeds of Sapindus, and they are expected to be used to develop
the 165 acre Sapindus forest, which Ding Neng Bio-tech expects will provide
approximately one-third of its total raw materials demand through
2013. As of September 30, 2010 and December 31, 2009, Ding Neng
Bio-tech made prepayments of $2,256,783 and $1,220,690, respectively, towards
the total purchase price to TianTai.
Net cash
used in financing activities was $130,702 for the twelve months ended December
31, 2009. Net cash provided by financing activities was $1,033,983 for the
twelve months ended December 31, 2008. Shareholders increased capital
contributions by $590,069 in 2008. By the end of 2009, Ding Neng Holdings did
not have any loans due to or borrowings from, third parties, but did incur
related party debt for working capital purposes. Net borrowings from
related parties were $443,914 for fiscal year 2008 and net repayment to related
parties was $130,702 for fiscal year 2009.
Working
Capital
As of
December 31, 2009, Ding Neng Holdings had $85,248 of cash and cash equivalents,
which was $77,487 as of December 31, 2008. As of December 31, 2009,
Ding Neng Holdings had $1,626,414 of accounts receivables from five customers,
which was $1,181,654 from four customers as of December 31, 2008.
As of
December 31, 2009, Ding Neng Holdings had $721,042 of inventory on hand, which
was $398,040 as of December 31, 2008. Because Ding Neng Bio-tech’s
production is based on orders on hand, its inventory liquidity was in good
condition, and no value reduction was estimated for the short-term inventory
reserve.
As of
December 31, 2009, Ding Neng Holdings had $203,842 prepayments for various
research and development expenses. Ding Neng Holdings had $131,186 of
prepaid expenses outstanding as of December 31, 2008.
As of
December 31, 2009, Ding Neng Holdings had current assets of $2,636,546 and
current liabilities of $2,909,065, which resulted in negative working capital of
($272,519) compared to negative working capital of ($1,359,970) as of December
31, 2008.
NINE
MONTHS ENDED SEPTEMBER 30, 2010 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30,
2009
Revenue
Ding Neng
Holdings’ total revenue increased by $12,955,455 or approximately 113%, from
$11,488,352 in the nine months ended September 30, 2009 to $24,443,807 in the
nine months ended September 30, 2010. This increase was primarily attributable
to significant increased sales of biodiesel. Revenue from biodiesel
in the nine months ended September 30, 2010 increased by $9,181,119 to
$19,773,599, compared to $10,592,480 in the nine months ended September 30,
2009. Biodiesel production contributed 81% of total revenue in the
nine months ended September 30, 2010, and 92% for the nine months ended
September 30, 2009. Crude biodiesel revenue was $2,098,095, or
approximately 9% of total revenue in the nine months ended September 30,
2010. The revenue from crude biodiesel in the nine months ended
September 30, 2009 was $895,872, approximately 8% of total revenue. Ding Neng
Bio-tech also introduced a new product called acidified oil in
January, 2010. In the nine months ended September 30, 2010, revenue from
acidified oil was $2,570,860, or approximately 10% of total
revenue.
Cost
of Revenue
Ding Neng
Holdings’ overall cost of revenue increased by $7,174,102 or approximately 78%
from $9,151,977 in the nine months ending September 30, 2009 to $16,326,079 in
the nine months ending September 30, 2010. This increase was primarily due to
increased costs from the significant increase in revenue. Total
biodiesel production cost increased by $4,537,339, or approximately 56%, from
$8,168,234 in the nine months ending September 30, 2009 to $12,705,573 in the
nine months ending September 30, 2010. Although a significant increase in
purchases occurred, Ding Neng Holdings was able to benefit from economies of
scale in transportation, so freight-in cost remained stable. The cost
of crude biodiesel revenue was $1,471,722 in the nine months ending September
30, 2010, compared to $663,591 in the nine months ending September 30, 2009. The
cost of acidified oil revenue was $1,849,581 for the nine months ending
September 30, 2010.
The
difference between revenue increase percentage and overall cost increase
percentage is approximately 35%. This significant improvement was due to
following:
(1) For
the nine months ended September 30, 2009, sales volume was 14,572 tons and the
average sales price was $788/ton. In nine months ended September 30, 2010, sales
volume was 26,272 tons, and the average sales price
was
$
7
53
/ton
.
The
increase in sales volume was
180
% and the
increase in sales price was
4
%.
(2)
For cost
of revenue, the average cost for the
nine
months
ended
September
30,
2009 was $
628
/ton. The
average cost for same period
of
2010 was $
621
/ton. The
increase in sales volume was
180
% and the
decrease in average cost of revenue is
13
%
.
Ding Neng
Holdings concluded that cost efficiency was the main factor attributable to
its improved production output. Other factors include new techniques and updated
processing systems.
Selling
Expenses
Ding Neng
Holdings’ selling expenses increased by $55,704, or approximately 35%, to
$214,376 for the nine months ended September 30, 2010, compared to $158,672 for
the nine months ended September 30, 2009.
Below is
the description for detailed selling expenses:
|
Description
|
|
Nine
Months
Ended
September
30, 2010
|
|
|
Nine
Months
Ended
September
20, 2009
|
|
|
Business
taxes
|
|
$
|
17,100
|
|
|
$
|
4,421
|
|
|
Freight
– outbound
|
|
$
|
173,197
|
|
|
$
|
134,267
|
|
|
Salaries
– sales
|
|
$
|
20,628
|
|
|
$
|
14,390
|
|
|
Miscellaneous
other fees
|
|
$
|
3,451
|
|
|
$
|
5,594
|
|
|
Subtotal
|
|
$
|
214,376
|
|
|
$
|
158,672
|
|
Corresponding
with the increase in sales revenue, outbound freight costs increased
significantly as well. Ding Neng Bio-tech has only 3 employees in
sales, consistent with its strategy to seek large, long-term customers rather
than trying to develop a large number of small customers. Much of its
time and resources is spent on research and development to improve production
quality.
Research
and Development Expenses
Ding Neng
Holdings’ research and development expenses increased by $261,717, or
approximately 73%, to $618,814 for the nine months ended September 30, 2010,
from $357,097 for the nine months ended September 30, 2009. Ding Neng Bio-tech’s
production capacity limit was 20,000 tons in 2009 and expect to be 40,000 tons
in the end of 2010. Ding Neng Bio-tech has doubled capacity in recent
years without a commensurate increase in production facilities and equipment
expenditures. The major contribution to increased production came from system
redesign and technology improvements, which required some additional equipment,
raw materials and technical support personnel. Certain technical personnel come
from outside institutions or consulting companies, while others are employees
from Ding Neng Bio-tech’s research and investigation department. Ding
Neng Holdings expects expenditures on research and development to increase in
the future.
General
and Administrative Expenses
Ding Neng
Holdings’ total general and administrative expenses increased by $353,364, or
approximately 305%, to $469,066 in the nine months ended September 30, 2010 from
$115,702 in the nine months ended September 30, 2009. This
represented only 1 to 2% of total revenues in both periods. The majority of the
general and administrative expenses are employee wages and
benefits.
Ding Neng
Holdings saw wages and benefits expenses increased by $83,747, or approximately
91%, to $176,157 in the nine months ended September 30, 2010 from $92,410 in the
nine months ended September 30, 2009.
Net
Income
Net
income increased by $4,433,171, or approximately 252%, to $6,195,079 for the
nine months ended September 30, 2010, from net income of $1,761,908 for the nine
months ended September 30, 2009. The increase is primarily due to the increase
in sales discussed above.
Ding Neng
Holdings has incurred income taxes since January 1, 2010, despite having a
waiver of income tax obligations in 2008 and 2009 (due to net losses in 2006 and
2007), and has received a 50% reduction of its income tax obligations in 2010,
2011 and 2012. For the nine months ended September 30, 2010, Ding
Neng Holdings incurred $885,011 in income tax expenses.
Liquidity
and Capital Resources
Net cash
provided from operating activities was $5,935,394 for the nine months ended
September 30, 2010, compared to net cash provided from operating activities of
$2,224,283 for the nine months ended September 30, 2009. Net cash
used in investing activities was $1,403,491 for the nine month period ended
September 30, 2010, compared with $0 for the nine months ended September 30,
2009.
As of
September 30, 2010 and December 31, 2009, Ding Neng Holdings has made $2,323,494
and $1,220,690 respectively, in prepayments towards the total purchase price
pursuant to the agreement with TianTai disclosed above.
Net cash
used in financing activities was $2,018,656 and $325,667 for the nine months
ended September 30, 2010 and 2009, respectively. Net cash used in financing
activities for nine months ended September 30, 2010 represented net cash
repayments to the related parties and former shareholder, and net cash receipts
from bank borrowing and related party borrowing. Net cash used in financing
activities for the nine months ended September 30, 2009 represented net cash
repayments to the related parties.
Working
Capital
As of
September 30, 2010 Ding Neng Holdings had $2,683,673 cash and cash equivalents,
compared to $85,248 at December 31, 2009. As of September 30, 2010,
Ding Neng Holdings had $12,615,245 in accounts receivables, compared to
$1,626,414 as of December 31, 2009.
As of
September 30, 2010 Ding Neng Holdings had $895,064 of inventory on hand,
compared to $721,042 as of December 31, 2009. Because Ding Neng
Bio-tech’s production is based on orders on hand, its inventory liquidity was in
good condition and no value reduction was estimated for the short-term inventory
reserve.
As of
September 30, 2010, Ding Neng Holdings had $1,244,324 of prepaid expenses,
compared to $203,842 of prepaid expenses as of December 31, 2009. As
of September 30, 2010, Ding Neng Holdings had current assets of $7,438,306 and
current liabilities of $2,672,701, which resulted in working capital of
$4,765,605, compared to a working capital deficit of $(272,519) as of December
31, 2009.
MARKET
FOR DING NENG HOLDINGS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS
Ding Neng
Holdings’ common stock is not trading and has not traded on any public trading
market or stock exchange.
Holders
of Common Equity
As of
December 6, 2010, Ding Neng Holdings had an aggregate of 50,000 ordinary shares
issued and outstanding and 14 shareholders.
Dividends
Neither
Ding Neng Holdings nor Ding Neng Bio-tech has paid any cash dividends on its
equity securities. Any future decisions regarding
dividends will be made by their respective board of directors. They currently
intend to retain and use any future earnings for the development and expansion
of their business and do not anticipate paying any cash dividends in the
foreseeable future. Each board of directors has complete discretion
on whether to pay dividends. Even if a decision is made to pay dividends, the
form, frequency and amount will depend upon their future operations and
earnings, capital requirements, surplus, general financial condition,
contractual restrictions and other factors such board of directors may deem
relevant.
Securities
Authorized for Issuance under Equity Compensation Plans
Neither
Ding Neng Holdings nor Ding Neng Bio-tech currently has in effect any
compensation plans under which its respective equity securities are authorized
for issuance.
Options
and Warrants
As of
September 30 and October 31, 2010, neither Ding Neng Holdings nor Ding Neng
Bio-tech had any outstanding options or warrants.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
DIRECTORS
AND EXECUTIVE OFFICERS
Upon
consummation of the Acquisition, the Board and executive officers of the Company
shall be as follows:
|
Directors and Executive
Officers
|
|
Age
|
|
Position / Title
|
|
Xinfeng
Nie
|
|
39
|
|
Chairman
of the Board
|
|
Sanfu
Huang
|
|
53
|
|
Chief
Executive Officer and Director
|
|
Jingmei
Weng
|
|
34
|
|
Chief
Financial Officer and Director
|
|
Zhibin
Jin
|
|
29
|
|
Secretary
|
|
Jianjun
Xu
|
|
36
|
|
Director
|
|
Mingyong
Hu
|
|
32
|
|
Director
|
|
Fulun
Su
|
|
62
|
|
Director
|
|
Bin
Zhao
|
|
45
|
|
Director
|
Mr.
Xinfeng Nie is the co-founder of Ding Neng Bio-tech and has served as its
Chairman since its inception in 2006. Mr. Nie served as a manager of
Foiujian Baijia Hongyi Oil Refinery Factory from 2003 to 2005. Mr. Nie obtained
his bachelor degree in Oil Engineering from the Zhengzhou Institute of
Technology in Henan province in 1996. Mr. Nie was chosen to be a member of the
post-acquisition board based on his substantial experience in the oil and
biodiesel industry. Mr. Nie still leads Ding Neng Bio-tech’s
technology research and development team to improve its production and volume
capacity.
Mr. Sanfu
Huang joined Ding Neng Bio-tech in November 2009 and serves as the Chief
Executive Officer and Director. Mr. Huang has been the Chairman of
Jiangsu Yancheng Sanfu Daily Makeup Production Ltd since 2002 and the Chairman
of Jianhu Qinglong Forest Development Co., Ltd since 2009. Mr. Huang
obtained his bachelors degree in Chemistry from TaiWan Culture University in
1976. He has been the General Secretary of the China-Taiwan Agriculture Exchange
Committee since 1998. Mr. Huang was chosen to be a member of the
post-acquisition board based on his experience researching and developing the
economic and medical value of Sapindus for more than 10 years and is considered
an expert in Sapindus’ growth and utilization.
Ms.
Jingmei Weng joined Dingneng Holdings in January 2010 as the Chief Financial
Officer and a Director of Ding Neng Bio-tech. Ms. Weng was the chief
financial officer and executive director of Tsingda Century Education Investment
Consulting Ltd from August 2007 to June 2009. From April 2006 to
August 2007, she was the senior associate in Systems and Processes Audit
Department of PricewaterhouseCoopers Consulting Ltd in Beijing. Ms.
Weng obtained her bachelor degree in Foreign Accounting from the Central
University of Finance and Economics in 1998. She received a masters
degree in International Banking from Loughborough University in United Kingdom
in 2004. Ms. Weng was chosen to be a member of the post-acquisition board based
on her deep understanding and cross-industry practice with both PRC and U.S.
GAAP. She is also experienced with Sarbanes-Oxley compliance and
audit and internal risk management.
Mr.
Zhibin Jin joined Ding Neng Bio-tech in October 2010 serving as its Corporate
Secretary. From July 2009 through September 2010, Mr. Jin helped
manage his family’s real estate investments in China and the
U.S. From October 2007 to June 2009, he was a financial manager at
Wan Xiang De Nong Seed Ltd., where he was responsible for compiling consolidated
financial statements and monitoring financial reporting systems. From
October 2004 through October 2007, Mr. Jin was an audit project manager at
Jonten Certified Public Accountants. Mr. Jin graduated from the
Institute of Disaster Prevention with a degree in Accounting in
2001.
Mr. Bin
Zhao was appointed as director of Ding Neng Holdings in November, 2010. Mr. Zhao
has been a partner and the deputy chief accountant and deputy general manager of
Daxin Certified Public Accountants LLP in China since 2002. He has
served as an independent director for Anhui Tianda Oil Pipe Company Limited
(HKEX: 00839) since July 2006. Mr. Zhao obtained his Ph.D from the
University of Mining & Technology of China in 2006. As a Chinese Certified
Public Accountant and a Chinese Certified Public Evaluator, he has extensive
experience with financial audits, financial management, risk management and
internal control processes. Mr. Zhao has substantial experience and
understanding of PRC GAAP and IAS practices. Being a partner of an accounting
firm and a non-executive director of a Hong Kong listed company for more than 4
years, Mr. Zhao was chosen to be a member of the post-acquisition board due to
his understanding of PRC GAAP and IAS practice.
Mr. Fulun
Su was appointed as director of Ding Neng Holdings in November, 2010. Mr. Su has
served as President of Fujian Quanzhou Business Association, Chairman of Shanxi
HongYuan Real Esate Development Ltd and Chairman of ZHR Capital Ltd. since
1992. Mr. Su was chosen to be a member of the post-acquisition board
based on his wealth of experience in business management and corporate
governance. As a well-known president of various business
associations, Mr. Su has devoted much time and effort to supporting local
economic development and to investing in and creating new companies and
technologies.
Mr.
Mingyong Hu was appointed as a director of Ding Neng Holdings in November, 2010.
Mr. Hu has been a Chief Analyst at Wealth Index Capital Group since June
2007. From April 2005 to June 2007, he was a senior project manager
at China Consultants of Advisory and Finance Management Co., Ltd. Mr.
Hu obtained his bachelor's degree in Accounting from Hu Nan University, in
2001. He became a China CPA Chartered Holder in 2002. Mr.Hu has
operated seven oversea listing projects for Wealth Index since 2007. He is
familiar with corporate governance and internal financial risk management.
It is these experiences and qualifications upon which Mr. Hu was chosen to be a
member of the post-acquisition board.
Mr.
Jianjun Xu was appointed as a director of Ding Neng Holdings in November, 2010.
Mr. Xu has been a Researcher in the China National Institute of Standardization
since April 2004. Mr. Xu obtained his Ph.D in Technical Science from
Jiangnan University in Chian in 2004. Mr. Xu is a member of
Standardization Administration Committee of the National Food Quality
Supervision Committee. As a project research leader, he was in charge or joined
more than 30 projects related to food safety and quality standardization in
recent years. Mr. Xu has taken part in the establishment of 7 national
standards, and published 5 professional articles. Based on such
professional experience, Mr. Xu was chosen to be a member of the
post-acquisition board. This experience will inure to its benefit as
it seeks to streamline its production processes and maintain high product
quality.
Independence
of Directors
Upon
the closing of the Acquisition, the board of directors of the Company will
consist of Mr. Xinfeng Nie, Mr. Sanfu Huang, Ms. Jingmei Weng, Mr. Jianjun Xu,
Mr. Mingyong Hu, Mr. Fulun Su, and Mr. Bin Zhao. Mr. Jianjun Xu, Mr.
Fulun Su, and Mr. Bin Zhao are “independent directors” as defined by the NASDAQ
Marketplace Rules and will meet the independence standards set forth in Rule
10A-3 of the Exchange Act
, as is Mr.
Hu
.
Board
Committees
Upon the
completion of the Acquisition, the Company expects its audit, compensation and
nominating committees to consist solely of independent directors as such term is
defined in the NASDAQ Marketplace Rules, and with respect to its audit committee
members, to meet the independence standards set forth in Rule 10A-3 of the
Exchange Act.
The
Company’s audit committee will consist of Mr. Bin Zhao, Mr. Fulun Su and Mr.
Mingyong Hu, with Mr. Bin Zhao serving as the chairman and “financial expert” of
such committee. The nominating committee will consist of Mr. Fulun
Su, Mr. Mingyong Hu and Mr. Bin Zhao, with Mr. Fulun Su serving as the
chairman. The Company’s compensation committee will consist of Mr.
Mingyong Hu, Mr. Bin Zhao and Mr. Jianjun Xu, with Mr. Mingyong Hu serving as
its chairman.
EXECUTIVE
COMPENSATION
The
following table sets forth compensation information for services rendered by
Ding Neng Bio-tech’s chief executive officer during the last two (2) completed
fiscal years (ended December 31, 2009 and 2008). No other officer received more
than $100,000 in total compensation during those years.
|
SUMMARY COMPENSATION TABLE
|
|
|
Name
and
Principal
Position
|
|
Fiscal
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compens-ation
($)
|
|
|
Total
($)
|
|
|
Xinfeng
Nie, CEO (1)
|
|
2009
|
|
|
35,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,750
|
|
|
|
|
2008
|
|
|
16,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,800
|
|
|
Sanfu
Huang
CEO
(2)
|
|
2009
|
|
|
3,595
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,595
|
|
|
|
(1)
|
Resigned
as CEO on October 31, 2009
|
|
|
(2)
|
Began
employment on November 1, 2009
|
Each of
Mr. Xinfeng Nie (Chairman of the Board of Ding Neng Holdings), Mr. Sanfu Huang
(CEO), Ms. Jingmei Weng (CFO) and Mr. Zhibin Jin (Secretary) have written
employment agreements each for a term of two years. Each of Mr. Nie
and Mr. Huang receives an annual salary of $180,000. Ms. Weng
receives $160,000 annually and Mr. Jin receives a salary of
$100,000. None receives any other compensation or reimbursement from
Ding Neng Holdings or Ding Neng Bio-tech.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On
November 23, 2009, Ding Neng Bio-tech entered into an agreement with TianTai, a
company controlled by Mr. Sanfu Huang, Ding Neng Holdings’ CEO and a director,
to purchase 1000 mu (approximately 165 acres) of Sapindus forest and the
forest land use rights for RMB 20,000,000 (approximately $2.9
million). The forest ownership and land use right certificate is
subject to the Zhejiang Provenience Forestry Administration’s approval after the
completion of certain administrative processes. As of September
30, 2010, $2,256,783 of this amount has been paid to the seller. Ding
Neng Bio-Tech also paid TianTai approximately $50,000 in fiscal year 2009 for
land and forest maintenance fees.
On
January 3, 2010, Ding Neng Bio-tech entered into a technical cooperation
research and development agreement with TianTai to mutually develop techniques
to produce biodiesel and other daily-used chemicals from Sapindus for a
consideration of
approximately
$661,000. The agreement terminates on January 2, 2012. As
of September 30, 2010, Ding Neng Bio-tech had paid approximately $464,400
towards the total consideration.
On July
9, 2010, China Minsheng Banking Corp., Ltd., Xiamen Branch (the “Bank”) and
Jianhu Qinglong Forest Development Co., Ltd. (“Jianhu”), a company controlled by
Mr. Sanfu Huang, entered into a Guaranty Agreement, under which Jianhu signed as
a guarantor for a RMB 20,000,000 (approximately U.S. $2,937,000) credit line
granted by the Bank to Ding Neng Bio-tech.
On
November 5, 2010, Ding Neng Bio-tech, its shareholders and the Fuhua signed a
series of contractual agreements in which Fuhua effectively assumed management
of the business activities of Ding Neng Bio-tech and has the right to appoint
all executives and senior management and the members of the board of directors
of Ding Neng Bio-tech. The shareholders of Ding Neng Bio-tech pledged
100% of their equity interest of Ding Neng Bio-tech to Fuhua as a security for
the obligations of payment of management and service fees, and irrevocably
granted to Fuhua, or a designee, an option to purchase at any time all or a
portion of the equity interest of Ding Neng Bio-tech in accordance with
procedures as determined by Fuhua. The shareholders of Ding Neng Bio-tech agreed
to irrevocably grant and entrust to Fuhua, for the maximum period of time
permitted by law, all of their voting rights as shareholders of Ding Neng
Bio-tech. Such series of agreements include a Consulting Services Agreement, an
Equity Pledge Agreement, an Option Agreement and a Voting Rights Proxy
Agreement.
On
September 28, 2010, Mr. Nie Xinfeng and Ding Neng Bio-tech entered into a
Vehicle Rent Agreement, in which Mr. Nie Xinfeng rented four vehicles owned by
him to Ding Neng Bio-tech, for a period from October 1, 2010 through September
30, 2015. The rental is RMB 350,000 (approximately U.S. $51,400) per
annum. Ding Neng Holdings believes this arrangement is on terms
similar to those it could have negotiated in an arms length transaction with an
unrelated third party.
At
September 30, 2010, Ding Neng Bio-tech's outstanding borrowings for working
capital purposes was $
561,820
from Mr. Nie,
and $
513,930
from Mr.
Huang.
BENEFICIAL
OWNERSHIP OF SECURITIES
The
following table sets forth information with respect to the beneficial ownership
of Common Stock immediately after the consummation of the Acquisition by each
person who is expected to beneficially own more than 5% of the Common Stock and
each post-acquisition officer, each post-acquisition director and all
post-acquisition officers and directors as a group.
Common
Stock which an individual or group has a right to acquire within 60 days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person shown in the
table.
|
|
|
Common stock if the Company acquires
Ding Neng
Holdings(2)
|
|
|
Name and Address of Beneficial Owner (1)
|
|
Number
|
|
|
Percent
|
|
|
Xinfeng
Nie
|
|
|
2,924,121
|
|
|
|
26.7
|
%
|
|
Sanfu
Huang
|
|
|
2,065,782
|
|
|
|
18.9
|
%
|
|
Jingmei
Weng
|
|
|
-
|
|
|
|
-
|
|
|
Zhibin
Jin
|
|
|
-
|
|
|
|
-
|
|
|
Jianjun
Xu
|
|
|
-
|
|
|
|
-
|
|
|
Mingyong
Hu
|
|
|
-
|
|
|
|
-
|
|
|
Fulun
Su
|
|
|
-
|
|
|
|
-
|
|
|
Bin
Zhao
|
|
|
-
|
|
|
|
-
|
|
|
All
directors and officers as a group (8 persons)
|
|
|
4,989,903
|
|
|
|
45.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
5%
Shareholders
|
|
|
|
|
|
|
|
|
|
Zewen
Holding Co., Ltd.
|
|
|
1,014,738
|
|
|
|
9.3
|
%
|
|
Wealth
Index Capital Group LLC (3)
|
|
|
558,572
|
|
|
|
5.1
|
%
|
|
*
|
Less
than 1% of Ding Neng Holdings’ outstanding shares of common
stock.
|
|
(1)
|
Unless
otherwise indicated, the address for each stockholder listed in the above
table is c/o Ding Neng Holdings Ltd., P.O. Box 957, Offshore,
Incorporations Center, Road Town, Tortola, British Virgin
Islands.
|
|
(2)
|
Assumes
the Reverse Stock Split is conducted on a 1:40
basis.
|
|
(3)
|
Principal
business address is Naaman’s Building, Suite 206, 3501 Silverside Road,
Wilmington, Delaware.
|
AMENDMENT
TO CERTIFICATE OF INCORPORATION
FOR
REVERSE
STOCK SPLIT
In
anticipation of and prior to the consummation of the Acquisition, the Company
will file with the Secretary of State of Delaware an amendment to our
certificate of incorporation to effect a reverse stock split at a ratio of
one-for-forty, as set forth in the form attached as
Annex C
, to this information
statement.
Purpose
of the Reverse Stock Split Amendment
The
Company's securities are currently traded on the Pink
Sheet. Thus, the post-acquisition entity must meet the initial
listing requirements of the NASDAQ Capital Market which requires a minimum bid
price of $4.00 per share. To assist the post-acquisition entity
to meet this minimum bid requirement, the Company will effect a reverse
stock split at a ratio of one-for-forty prior to the consummation of the
Acquisition. The Board has the authority, but not the obligation, to
effect the Reverse Stock Split. We cannot provide any assurances that
the post-Reverse Stock Split market price of our Common Stock will increase
proportionately to reflect the ratio for the Reverse Stock Split or that the
market price of our Common Stock will not decrease to its pre-Reverse Stock
Split level.
Impact
of the Reverse Stock Split
The
immediate effect of a Reverse Stock Split would be to reduce the number of
shares of Common Stock outstanding, and to increase the trading price of the
Common Stock. However, the effect of any Reverse Stock Split upon the market
price of the Common Stock cannot be predicted, and the history of reverse stock
splits for companies in similar circumstances is varied. The Company cannot
assure you that the trading price of the Common Stock after the Reverse Stock
Split will rise in exact proportion to the reduction in the number of shares of
the Common Stock outstanding as a result of the Reverse Stock Split. The trading
price of the Common Stock may change due to a variety of other factors,
including factors related to the Company’s business, and general market
conditions.
Upon
effectiveness of the Reverse Stock Split, the number of shares of Common Stock
held by each stockholder will be reduced by dividing the number of shares held
immediately before the Reverse Stock Split by forty.
The
Reverse Stock Split will be realized simultaneously and in the same ratio for
all of the Common Stock. The Reverse Stock Split will affect all holders of
Common Stock uniformly and will not affect any stockholder’s percentage
ownership interest in the Company. As described below, holders of Common Stock
otherwise entitled to a fractional share of more than 0.5 shares as a result of
the Reverse Stock Split will receive an additional share in lieu of such
fractional share. These additional shares will increase the number of
post-Reverse Stock Split holders of our Common Stock to the extent there are
concurrently stockholders who would otherwise have received less than one share
of Common Stock after the Reverse Stock Split. In addition, the Reverse Stock
Split will not affect any stockholder’s proportionate voting power (subject to
the treatment of fractional shares).
The
Reverse Stock Split will not change the number of authorized shares of Common
Stock as designated by the Company’s Amended and Restated Certificate of
Incorporation. Therefore, because the number of issued and outstanding shares of
Common Stock will decrease, the number of shares of Common Stock remaining
available for issuance will increase.
The table
below illustrates the effect, as of December 6, 2010, of a Reverse Stock Split
at a ratio of 1:40 on the shares of Common Stock outstanding and the
resulting number of shares of Common Stock available for issuance:
|
Reverse
Stock Split
Ratio
|
|
Shares of
Common Stock
Outstanding
Before the
Reverse Stock
Split
|
|
|
Shares of
Common Stock
Outstanding
After the Reverse
Stock Split
|
|
|
Shares of Common
Stock Available for
Issuance After the
Reverse Stock Split
|
|
|
1:40
|
|
46,000,000
|
|
|
1,150,000
|
|
|
98,850,000
|
|
Aside from the Acquisition, we do not presently have any
plans, proposals or arrangements, written or otherwise, to issue any of the
newly available authorized shares of our common stock resulting from the Reverse
Stock Split for any purpose including future acquisitions or
financings.
Release No. 34-15230 of the staff of the Securities and
Exchange Commission requires disclosure and discussion of the effects of any
proposal that may be used as an anti-takeover device. However, the increase in
our authorized Common Stock resulting from the Reverse Stock Split is not the
result of any such specific effort. Rather, as indicated above, the
purpose of the Reverse Stock Split is to provide the Company’s board of
directors with a mechanism to raise the per share trading price of our Common
Stock to assist the post-acquisition entity to meet the initial
listing requirements of the NASDAQ Capital Market which requires a minimum bid
price of $4.00 per share, and not to construct or enable any anti-takeover
defense or mechanism on behalf of our Company. While it is possible that
management could use the additional shares to resist or frustrate a third-party
transaction providing an above-market premium that is favored by a majority of
the independent stockholders, our Company presently has no intent or plan to
employ any additional authorized shares as an anti-takeover device. As a
consequence, the effective increase in authorized Common Stock may make it more
difficult for, prevent or deter a third party from acquiring control of our
Company or changing our board of directors and management. In
addition, we currently have no plans or proposals to adopt other provisions or
enter into arrangements that may have anti-takeover
consequences.
Although our Company currently has no such provisions in
any of our governing documents, as summarized below, provisions of our Company’s
Certificate of Incorporation and By-laws and applicable provisions of the
Delaware General Corporation Law may have anti-takeover effects, making it more
difficult for, or preventing a third party from, acquiring control of our
Company or changing our board of directors and management. These provisions may
also have the effect of deterring hostile takeovers or delaying changes in our
Company’s control or in our management.
No Cumulative Voting.
Our Company’s Certificate of Incorporation and By-laws
do not provide for cumulative voting in the election of directors. The
combination of the present ownership by a few stockholders of a significant
portion of our Company’s issued and outstanding Common Stock and lack of
cumulative voting makes it more difficult for other stockholders to replace our
Company’s board of directors or for another party to obtain control of our
Company by replacing our board of directors.
Section 203 of the General
Corporation Law of the State of Delaware.
Our Company is subject to the provisions of Section 203
of the Delaware General Corporation Law regulating corporate takeovers. In
general, Section 203 prohibits a publicly-held Delaware corporation from
engaging, under certain circumstances, in a business combination with an
interested stockholder for a period of three years following the time the person
became an interested stockholder unless:
|
|
•
|
prior to the time the person
became an interested stockholder, the board of directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder;
|
|
|
•
|
upon completion of the
transaction that resulted in the stockholder becoming an interested
stockholder, the stockholder owned a least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the voting stock outstanding (but not the
outstanding stock owned by the interested stockholder) those (1) shares
owned by persons who are directors and also officers and (2) shares owned
by employee stock plans in which employee participants do not have the
right to determine confidentiality whether shares held subject to the plan
will be tendered in a tender or exchange offer;
or
|
|
|
•
|
at or subsequent to the time the
person became an interested stockholder, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66.67% of the outstanding voting stock which is not owned
by the interested
stockholder.
|
The application of Section 203 may limit the ability of
our Company’s stockholders to approve a transaction that they may deem to be in
their interest. Under Section 203, a “business combination” generally includes a
merger or consolidation or asset or stock sale, or other similar transaction
with an interested stockholder, and an “interested stockholder” is generally a
person who, together with it affiliates and associates, owns or, in the case of
affiliates or associates of the corporation, owned 15% or more of a
corporation’s outstanding voting securities within three years prior to the
determination of interested stockholder status.
Procedure
for Effecting the Reverse Stock Split and Exchange of Stock
Certificates
On the
effective date of the Reverse Stock Split, each certificate representing shares
of the Common Stock before the Reverse Stock Split will be deemed, for all
corporate purposes, to evidence ownership of the reduced number of shares of
Common Stock resulting from the Reverse Stock Split. All options, warrants,
convertible debt instruments and other securities will also be automatically
adjusted on the effective date.
The
Company anticipates that its transfer agent will act as the exchange agent for
purposes of implementing the exchange of stock certificates. As soon as
practicable after the effective date, stockholders and holders of securities
convertible into the Common Stock will be notified of the effectiveness of the
Reverse Stock Split. Stockholders of record will receive a letter of
transmittal requesting them to surrender their stock certificates for stock
certificates reflecting the adjusted number of shares as a result of the Reverse
Stock Split. Persons who hold their shares in brokerage accounts or
“street name” will not be required to take any further actions to effect the
exchange of their certificates. Instead, the holder of the certificate will be
contacted.
No new
certificates will be issued to a stockholder until the stockholder has
surrendered the stockholder’s outstanding certificate(s) together with the
properly completed and executed letter of transmittal to the exchange agent.
Until surrender, each certificate representing shares before the Reverse Stock
Split will continue to be valid and will represent the adjusted number of shares
based on the exchange ratio of the Reverse Stock Split. Stockholders should not
destroy any stock certificate and should not submit any certificates until they
receive a letter of transmittal.
Fractional
Shares
The
Company will not issue fractional shares in connection with the Reverse Stock
Split. Instead, any fractional share of more than 0.5 shares resulting from the
Reverse Stock Split will be rounded up to the nearest whole share of Common
Stock.
Federal
Income Tax Consequences
The
following is a summary of material federal income tax consequences of the
Reverse Stock Split and does not purport to be complete. It does not discuss any
state, local, foreign or minimum income or other tax consequences. Also, it does
not address the tax consequences to holders that are subject to special tax
rules, including banks, insurance companies, regulated investment companies,
personal holding companies, foreign entities, nonresident alien individuals,
broker-dealers and tax-exempt entities. The discussion is based on the
provisions of the United States federal income tax law as of the date hereof,
which is subject to change retroactively as well prospectively. This summary
also assumes that the shares are held as a “capital asset,” as defined in the
Internal Revenue Code of 1986, as amended (generally, property held for
investment). The tax treatment of a stockholder may vary depending upon the
particular facts and circumstances of the stockholder. Each stockholder is urged
to consult with the stockholder’s own tax advisor with respect to the
consequences of the Reverse Stock Split.
No gain
or loss should be recognized by a stockholder upon the stockholder’s receipt of
shares pursuant to the Reverse Stock Split. The aggregate tax basis of the
shares received in the Reverse Stock Split would be the same as the
stockholder’s aggregate tax basis in the shares exchanged. The stockholder’s
holding period for the shares would include the period during which the
stockholder held the pre-split shares surrendered in the Reverse Stock
Split.
A
stockholder that receives cash in lieu of fractional shares will be treated as
if he first exchanged all of his shares solely for new shares including
fractional shares, and then had the fractional shares redeemed for the cash he
actually receives. Any cash received in the deemed redemption generally will be
treated as a dividend to the extent of the stockholder’s ratable share of the
undistributed earnings and profits of the Company unless the deemed redemption
results in a complete termination of the stockholder’s interest in the Company
or a “meaningful reduction” in the stockholder’s deemed stock ownership of the
Company. In making the determination of whether there is a “meaningful
reduction” in the stockholder’s deemed ownership of the Company, the stockholder
will, under the constructive ownership rules, be deemed to own not only the
shares that he actually owns, but also shares that are owned by certain related
persons and entities. The IRS has ruled that a stockholder in a publicly held
corporation whose relative stock interest is minimal and who exercises no
control with respect to corporate affairs is generally considered to have a
“meaningful reduction” if that stockholder has any reduction in his percentage
stock ownership. If the deemed redemption results in a complete termination of
the stockholder’s interest in the Company or a “meaningful reduction” in the
stockholder’s deemed stock ownership of the Company, the stockholder will
recognize capital gain or loss in an amount equal to the excess of the amount of
cash received over the tax basis allocated to the redeemed fractional shares.
The resulting capital gain or loss will be long-term capital gain or loss if the
stockholder has held the stock for more than one year. These rules are complex
and dependent upon the specific factual circumstances particular to each
stockholder. Each stockholder should consult his tax advisor as to the
application of these rules to his particular situation.
The
Company’s beliefs regarding the tax consequence of the Reverse Stock Split are
not binding upon the Internal Revenue Service or the courts, and there can be no
assurance that the Internal Revenue Service or the courts will accept the
positions expressed above. The state and local tax consequences of the Reverse
Stock Split may vary significantly as to each stockholder, depending upon the
state in which he or she resides.
AMENDMENT
TO CERTIFICATE OF INCORPORATION
FOR
NAME
CHANGE
Upon
consummation of the Acquisition, the Company will file a Certificate of
Amendment of Certificate of Incorporation to change its name from and after the
closing of the Acquisition to China Bio-Energy Corp. This new name
will better more accurately the Company’s business operations as a manufacturer,
refiner and distributor of bio-diesel fuel.
The
Certificate of Amendment of Certificate of Incorporation is attached hereto as
Annex D
.
DISSENTERS’ RIGHTS
OF APPRAISAL
Under the
DGCL, stockholders are not entitled to dissenters’ rights of appraisal in
connection with the Acquisition pursuant to the Share Exchange Agreement, as
amended, the Reverse Stock Split or the Name Change and the corresponding
amendments to the Company’s Certificate of Incorporation.
STOCKHOLDERS
SHARING AN ADDRESS
In
accordance with notices to many stockholders who hold their shares through a
bank, broker or other holder of record (a “street-name stockholder”) and share a
single address, only one information statement is being delivered to that
address unless contrary instructions from any stockholder at that address were
received. This practice, known as “householding,” is intended to reduce our
printing and postage costs. However, any such street-name stockholder residing
at the same address who wishes to receive a separate copy of this information
statement, or any future notices and documents, may make such request by
contacting the bank, broker or other holder of record, or our offices by
telephone at 86 10 5870 0673, or by mail to: Room 508, Shangdu International
Center, No. 8, Dong Da Xiao Road, Chao Yang District, Beijing, Attention:
Wingfei Yang. In addition, any such street-name stockholders residing at the
same address who have received multiple copies of this information statement and
wish to receive a single copy of our annual reports, information statements and
proxy materials in the future may contact the bank, broker or other holder of
record, or our offices at the contact information above.
WHERE
YOU CAN FIND MORE INFORMATION
The
Company files reports, information statements and other information with the SEC
as required by the Exchange Act. You may read and copy reports, information
statements and other information filed by the Company with the SEC at its public
reference room located at 100 F Street, N.E., Washington, D.C. 20549-1004. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. You may also obtain copies of the materials described
above at prescribed rates by writing to the SEC, Public Reference Section, 100 F
Street, N.E., Washington, D.C. 20549-1004. The Company files reports,
information statements and other information electronically with the SEC. You
may access information on the Company at the SEC web site containing reports,
information statements and other information at http://www.sec.gov. This
information statement describes the material elements of relevant contracts,
exhibits and other information attached as annexes or exhibits to this
information statement. Information and statements contained in this information
statement are qualified in all respects by reference to the copy of the relevant
contract or other document included as an annex or exhibit to this
document.
All
information contained in this information statement relating to the Company has
been supplied by the Company, and all such information relating to Ding Neng
Holdings or Ding Neng Bio-tech has been supplied by Ding Neng Holdings or Ding
Neng Bio-tech, respectively.
INDEX
TO FINANCIAL INFORMATION
|
DESCRIPTION
|
|
PAGE
|
|
|
|
|
|
China
INSOnline Corp.
|
|
|
|
|
|
|
|
For the Three Months Ended September
30, 2010
|
|
F-2
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2010 and June 30, 2010
(unaudited)
|
|
F-3
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive (Loss) Income for
the Three Months Ended September 30, 2010 and 2009
(unaudited)
|
|
F-4
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Three Months Ended September
30, 2010 and 2009 (unaudited)
|
|
F-5
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
(unaudited)
|
|
F-6
|
|
|
|
|
|
For the Years Ended June 30, 2010 and
2009
|
|
F-12
|
|
|
|
|
|
Reports
of Registered Independent Public Accounting Firms
|
|
F-
13
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2010 and 2009
|
|
F-
15
|
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for the Years
Ended June 30, 2010 and 2009
|
|
F-
16
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity (Deficiency) for the Years Ended June
30, 2010 and 2009
|
|
F-
17
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2010 and
2009
|
|
F-
18
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-
19
|
|
|
|
|
|
Ding
Neng Holdings Limited
|
|
|
|
|
|
|
|
For the
Nine
Months
Ended
September
30,
2010 and 2009 and the Fiscal Years Ended December 31, 2009 and
2008
|
|
F-
29
|
|
|
|
|
|
Reports
of Registered Independent Public Accounting Firms
|
|
F-
30
|
|
|
|
|
|
Consolidated
Balance Sheets as of
September
30, 2010 and December 31, 2009 and 2008
|
|
F-
31
|
|
|
|
|
|
Consolidated
Statements of Operations and Other Comprehensive Income for the
Nine
Months Ended
September
30, 2010 and 2009 and the Fiscal Years Ended December 31, 2009 and
2008
|
|
F-
32
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the
Nine
Months Ended
September
30, 2010 and the Fiscal Years Ended December 31, 2009 and
2008
|
|
F-
33
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the
Nine
Months Ended
September
30, 2010 and 2009 and the Fiscal Years Ended December 31, 2009 and
2008
|
|
F-
34
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-
35
|
|
|
|
|
|
Pro
Forma Financial Statements
|
|
|
|
|
|
|
|
Unaudited
Pro Forma Consolidated Balance Sheet as of
September
30, 2010
|
|
F-
45
|
|
|
|
|
|
Unaudited
Pro Forma Consolidated Statement of Operations for the
Nine
Months Ended
September
30, 2010
|
|
F-
46
|
|
|
|
|
|
Unaudited
Pro Forma Consolidated Statement of Operations for the Year Ended December
31, 2009
|
|
F-
47
|
|
|
|
|
|
Notes
to the Unaudited Consolidated Pro Forma Financial
Statements
|
|
F-
48
|
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
Condensed Consolidated Financial
Statements
For the Three Months Ended September 30,
2010
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
September
30,
2010
|
|
|
June
30,
2010
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
115,711
|
|
|
$
|
92,094
|
|
|
Current
assets of discontinued operations
|
|
|
2,020
|
|
|
|
103,822
|
|
|
Total
Current Assets
|
|
|
117,731
|
|
|
|
195,916
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets of discontinued operations
|
|
|
29,529
|
|
|
|
29,529
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
147,260
|
|
|
$
|
225,445
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Short-term
loan
|
|
$
|
100,500
|
|
|
$
|
-
|
|
|
Current
liabilities of discontinued operations
|
|
|
1,043,018
|
|
|
|
809,861
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
1,143,518
|
|
|
|
809,861
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
DEFICIENCY
|
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; 100,000,000 shares authorized;
46,000,000
shares and 40,000,000 shares issued and outstanding
as
of September 30, 2010 and June 30, 2010, respectively
|
|
|
46,000
|
|
|
|
40,000
|
|
|
Additional
paid-in capital
|
|
|
2,060,535
|
|
|
|
86,360
|
|
|
Accumulated
deficits
|
|
|
(3,735,110
|
)
|
|
|
(1,451,677
|
)
|
|
Accumulated
other comprehensive income
|
|
|
632,317
|
|
|
|
740,901
|
|
|
Total
Stockholders’ Deficiency
|
|
|
(996,258
|
)
|
|
|
(584,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
$
|
147,260
|
|
|
$
|
225,445
|
|
See accompanying notes to condensed consolidated
financial statements
CHINA INSONLINE CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED S
TATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
|
|
|
Three
Months Ended September 30, 2010
|
|
|
Three
Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
|
|
$
|
(2,283,433
|
)
|
|
$
|
3,120,617
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation loss
|
|
|
(108,584
|
)
|
|
|
(17,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
(LOSS) INCOME
|
|
$
|
(2,392,017
|
)
|
|
$
|
3,102,800
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
BASIC
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
-
DILUTED
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
BASIC
|
|
|
46,000,000
|
|
|
|
40,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
-
DILUTED
|
|
|
44,793,478
|
|
|
|
40,000,000
|
|
See accompanying notes to condensed consolidated
financial statements
CHINA INSONLINE CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Three
Months Ended September 30, 2010
|
|
|
Three
Months Ended September 30, 2009
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
(loss) income from discontinued operations
|
|
$
|
(2,283,433
|
)
|
|
$
|
3,120,617
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
-
|
|
|
|
218,567
|
|
|
Depreciation
|
|
|
-
|
|
|
|
36,342
|
|
|
Loss
(Gain) on disposal of fixed assets
|
|
|
-
|
|
|
|
2,473
|
|
|
Deferred
taxes
|
|
|
-
|
|
|
|
(118,268
|
)
|
|
Equity
based payments to non employees
|
|
|
1,974,175
|
|
|
|
-
|
|
|
Changes
in operating assets and liabilities, :
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
-
|
|
|
|
6,327,857
|
|
|
Other
receivables
|
|
|
100,000
|
|
|
|
(48,609
|
)
|
|
Rental
deposits
|
|
|
1,802
|
|
|
|
56,333
|
|
|
Prepayments
and deposits
|
|
|
-
|
|
|
|
(10,689,494
|
)
|
|
Accounts
payable
|
|
|
-
|
|
|
|
(150,386
|
)
|
|
Other
payables and accrued liabilities
|
|
|
222,555
|
|
|
|
226,602
|
|
|
Taxes
payable
|
|
|
104
|
|
|
|
1,192,117
|
|
|
Net
cash provided by operating activities
|
|
|
15,203
|
|
|
|
174,151
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from options exercised
|
|
|
6,000
|
|
|
|
-
|
|
|
Acquisition
of software
|
|
|
-
|
|
|
|
(725,431
|
)
|
|
Acquisition
of fixed assets
|
|
|
-
|
|
|
|
(1,839
|
)
|
|
Proceeds
on disposal of fixed assets
|
|
|
-
|
|
|
|
1,755
|
|
|
Net
cash provided (used in) investing activities
|
|
|
6,000
|
|
|
|
(725,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term loan
|
|
|
100,500
|
|
|
|
-
|
|
|
Advance
from a director
|
|
|
10,498
|
|
|
|
-
|
|
|
Net
cash provided by financing activities
|
|
|
110,998
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
132,201
|
|
|
|
(551,364
|
)
|
|
Effect
of exchange rate changes on cash
|
|
|
(108,584
|
)
|
|
|
(17,784
|
)
|
|
Cash
and cash equivalents, at beginning of the period
|
|
|
92,094
|
|
|
|
1,217,085
|
|
|
CASH
AND CASH EQUIVALENTS, END OF THE PERIOD
|
|
$
|
115,711
|
|
|
$
|
647,937
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income
taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated
financial statements
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
and Basis of Presentation
China
INSOnline Corp. (“CHIO” or the “Company”) was incorporated on December 23, 1988
as a Delaware corporation. It became a shell company in June 2010 as
a result of winding down all operations. The
Company has not had any operations since June 30, 2010. As a result
of winding down its business in June 2010, the Company reclassified all prior
period amounts as discontinued operations.
The
unaudited condensed consolidated financial statements of the Company have been
prepared in accordance with U.S. Generally Accepted Accounting Principles
(“GAAP”) for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”) applicable to
Quarterly Reports on Form 10-Q. Accordingly, they do not include all the
information and footnotes required by GAAP for complete financial
statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the opinion
of management, necessary for the fair presentation of the consolidated financial
position and the consolidated results of operations. Results shown
for interim periods are not necessarily indicative of the results to be obtained
for a full year. The condensed consolidated balance sheet information as of June
30, 2010 was derived from the audited consolidated financial statements
included in the Company’s Annual Report on Form 10-K. These interim financial
statements should be read in conjunction with that report.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company experienced significant operating
losses and ceased all operations as of June 30, 2010. This raised substantial
doubt about its ability to continue as a going concern. The Company's existence
is dependent upon management's ability to obtain additional
financing. The Company is actively pursuing additional capital
injections from potential investors or equity partners as well as seeking other
growth opportunities by way of merger and
acquisition. See Note 8. The financial statements do not
include any adjustments that might result from this
uncertainty
2. Summary
of Significant Accounting Policies
(a)
Economic and Political Risks
The
Company's operations are conducted in the People’s Republic of China (the
“PRC”). Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environment in
the PRC, and by the general state of the PRC economy. The Company's operations
in the PRC are subject to special considerations and significant risks not
typically associated with companies in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal
environment and foreign currency exchange. The Company's results may be
adversely affected by changes in the political and social conditions in the PRC,
and by changes in governmental policies with respect to laws and regulations,
anti−inflationary measures, currency conversion, remittances abroad, and rates
and methods of taxation, among other things.
(b) Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary
of Significant Accounting Policies (Continued)
(c) Consolidation
The
condensed consolidated financial statements include the accounts of the
Company’s 100% owned subsidiaries Ever Trend Investment Limited (“
E
TI
”) and
Run Ze Yong Cheng Technologies, a wholly owned foreign entity (“WOFE”); variable
interest entities San Deng Ta Fei Technology (“SDTF”) and Guang Hua Insurance
Agency (
“
GHIA
”
), entities incorporated under the
laws of PRC. In accordance with certain professional standards, we are required
to include in our consolidated financial statements the financial statements of
variable interest entities. ASC Topic 810,
Consolidation,
requires
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss for the variable interest entity or is
entitled to receive a majority of the variable interest entity’s residual
returns. Variable interest entities are those entities in which we, through
contractual arrangements, bear the risk of, and enjoy the rewards normally
associated with ownership of the entity, and therefore we are the primary
beneficiary of the entity. STDF and GHIA are deemed variable interest
entities and the Company is the primary beneficiary as a result of various
consulting and service agreements among the Company, STDF and
GHIA. The subsidiaries and variable interest entities have not had
any operations since the Company wound down all of its operations in June
2010.
(d) Fair
Value of Financial Instruments
The
carrying amount of current assets and current liabilities reported in the
condensed consolidated balance sheets approximate fair market
value. The Company does not have any assets or liabilities measured
at fair value on a recurring or a non-recurring basis.
The
Company adopted Accounting Standards Codification (“ASC”) 820, Fair Value
Measurements (formerly Statement of Financial Accounting Standards (“SFAS”) No.
157, Fair Value Measurements) on January 1, 2008 for all financial assets and
liabilities and nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). ASC 820 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements.
ASC 820
defines fair value as the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which it would transact and it considers assumptions that market participants
would use when pricing the asset or liability.
ASC 820
establishes a fair value hierarchy that requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. A financial instrument’s categorization within the fair value
hierarchy is based upon the lowest level of input that is significant to the
fair value measurement. ASC 820 establishes three levels of inputs
that may be used to measure fair value:
Level 1
applies to assets or liabilities for which there are quoted prices in active
markets for identical assets or liabilities.
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary
of Significant Accounting Policies (Continued)
(d) Fair
Value of Financial Instruments (Continued)
Level 2
applies to assets or liabilities for which there are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability
such as quoted prices for similar assets or liabilities in active markets;
quoted prices for identical assets or liabilities in markets with insufficient
volume or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be derived
principally from, or corroborated by, observable market data.
Level 3
applies to assets or liabilities for which there are unobservable inputs to the
valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.
(e) Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash and cash equivalents.
(f) Foreign
Currency Translation
The
accompanying financial statements are presented in United States
dollars. The functional currencies of the Company are the Renminbi
(“RMB”) and the Hong Kong Dollar (“HKD”). The financial statements
are translated into United States Dollars (“US$” or “$”) from RMB and US$ from
HKD at period-end exchange rates as to assets and liabilities and average
exchange rates for the reported periods as to revenues and
expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
(g) Income
Taxes
The Company accounts for income tax
using the asset and liability approach. Deferred taxes are provided for the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future utilization is uncertain.
(h) Stock-Based
Compensation
The
Company accounts for all awards, including employee, director, non-employee,
consultant and advisor awards, by recognizing compensation expense based on the
fair value of share-based transactions. The Company recognizes
compensation expense using a ratable method (providing the minimum amount of
compensation recorded is equal to the vested portion of the award, requiring a
ratable method when necessary) and classifies these amounts in the condensed
consolidated statements of operations. The Company uses the Black-Scholes
valuation model to calculate the fair value of stock options, utilizing various
assumptions. The Company records equity instruments issued to
non-employees as expenses at their fair value over the related service
period.
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary
of Significant Accounting Policies (Continued)
(i) (Loss)
Earnings Per Share
Basic
loss/earnings per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted loss/earnings per share is computed similar to loss/basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive.
3. Related
Parties Transactions
During
the periods ended September 30, 2010 and 2009, the Chairman and Chief Executive
Officer of the Company, Mr. Wang Zhenyu, made advances to the Company for
operational needs. At September 30, 2010 and June 30, 2010, the
amount outstanding was $414,098 and $403,600, respectively. The
outstanding amounts are non-interest bearing, unsecured and have no fixed
repayment terms. As a result of the Company winding down its
operations, the outstanding balance is included in current liabilities of
discontinued operations.
4. Taxes
Corporation
Income Tax (“CIT”)
Historically
the Company did not generate any taxable income outside of the PRC. The
Company’s operational subsidiary GHIA was incorporated in PRC. Management does
not expect to repatriate GHIA’s net income back to the U.S. in the near future;
therefore GHIA is governed by the Income Tax Law of the PRC concerning
privately-run enterprises. To date, the Company has not filed the 2009 U.S. tax
returns with the federal and state tax authorities. There is $35,000
in accrued franchise tax payable included in current liabilities of discontinued
operations on the condensed consolidated balance sheet as of September 30,
2010.
5.
Current
liabilities of discontinued operations consist of the following:
|
|
|
September
30
|
|
|
June
30
|
|
|
|
|
2010
|
|
|
2010
|
|
|
Professional
fees
|
|
$
|
479,689
|
|
|
$
|
337,814
|
|
|
Franchise
tax payable
|
|
|
35,000
|
|
|
|
-
|
|
|
Due
to a director
|
|
|
414,098
|
|
|
|
403,600
|
|
|
Tax
payable
|
|
|
6,409
|
|
|
|
6,305
|
|
|
Others
|
|
|
107,822
|
|
|
|
62,142
|
|
|
Total
current liabilities of discontinued operations
|
|
$
|
1,043,018
|
|
|
$
|
809,861
|
|
6. Short
Term Loan
During
the current quarter, the Company’s subsidiary, Ever Trend Investment
Limited
(“
ETI”
)
,
entered into an unsecured short term loan agreement for $100,500 with an
unrelated party to meet the needs of its day-to-day activities. The
short term loan bears an interest rate of 3% per annum and is repayable on
December 31, 2010. Mr. Wang Zhenyu, the Chairman and Chief Executive
Officer of the Company, provides personal guarantee on the loan in the event of
default by
ETI
.
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Commitments
and Contingency
(a) Lease
Commitments
The
Company’s operating lease for its office will expire in February 2011 with
aggregate payments through such date of $10,749.
(b) Pledge
of common stock by a significant shareholder
Mr.
Zhengyu Wang, the Chairman and Chief Executive Officer of the
Company, entered into loan agreements dated January 8,
2010 and February 10, 2010 with Argyll Investments, LLC, pledging an aggregate
of 4,000,000 shares of the Company’s common stock owned by Mr. Wang to secure
personal loans of $1,260,000 at interest rate of 4% per annum for 36 months with
full recourse.
8. Stock-Based
Compensation
During
June 2010, the Company’s Board of Directors and shareholders approved the 2010
Stock Option Plan (the “2010 Plan”) which became effective on June 29,
2010. The 2010 Plan provides for the grant of incentive stock options
(“ISOs”) and stock options which do not qualify as ISOs, which are collectively
referred as “Options,” for the purchase of shares of the Company’s common stock
to the Company’s employees, officers, directors, and outside consultants and
advisors. An aggregate of 6,000,000 shares of the Company’s common stock
were authorized for future issuance under the 2010 Plan. Pursuant to
the 2010 Plan, stock options generally vest over a ten-year period and expire 10
years from the date of grant. Stock-based compensation cost is measured at the
grant date, based on the calculated fair value of the award, and is recognized
as an expense over the service period (generally the vesting period of the
equity grant).
In July
2010, the Company entered into certain consulting agreements with 4 consultants
for investor relations and marketing related services for a term of 4
years. In exchange for services to be received, the Company issued
options to purchase an aggregate of up to 6,000,000 shares at an exercise price
of $0.001 on July 19 and July 20, 2010. The options were fully vested
on the respective issuance dates. The Board of Directors approved the
issuance of the options granted to the consultants. All 6,000,000
options issued are exercised as of September 30, 2010. The Company
received $6,000 proceeds from the option exercises.
The
Company estimates the fair value of stock options granted using the
Black-Scholes model and assumptions as to the fair value of the common
stock on the grant date, expected term, expected volatility, risk-free rate of
interest and an assumed dividend yield. For awards granted, the
fair value of the common stock is generally determined based on the closing
price of the stock on the NASDAQ Capital Market on the grant
date. The Company estimated the expected volatility based on
the historical volatility of the Company’s common stock. The Company calculated
the expected life of options using the simplified method as prescribed by the
Stock Compensation Subtopic of the FASB Codification, due to the Company’s
limited employee exercises of its options. The assumed dividend
yield is based upon the Company’s expectation of not paying any dividends in the
foreseeable future. The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant for maturities similar to the expected
term.
The
Black-Scholes model assumptions for the period set forth below are as
follows:
|
|
|
September
30,
2010
|
|
|
Risk-free
interest rate
|
|
|
2.99%
|
|
|
Expected
life
|
|
1
year
|
|
|
Expected
volatility
|
|
|
31.5%
|
|
|
Expected
dividends
|
|
|
0%
|
|
The fair
value of options granted was $0.33 utilizing the Black-Scholes model. The
following table presents equity-based expense included in the loss from
discontinued operations, net of tax, line item on the condensed consolidated
statements of operations for the quarter ended September 30,
2010:
|
|
|
September
30,
2010
|
|
|
September
30,
2009
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
1,974,175
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2010, there was no unrecognized compensation cost related to
non-vested stock-based compensation arrangements granted under the 2010
Plan.'
As of September 30, 2010 and 2009, there are no options
outstanding or exercisable.
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Subsequent
Event
On
November 12, 2010, the Company entered into a Share Exchange Agreement with Ding
Neng Holdings Limited (“Ding Neng Holdings”), a British Virgin Islands business
company, and the shareholders of Ding Neng Holdings.
Pursuant
to the Share Exchange Agreement, the Company will acquire from the Ding Neng
Holdings Shareholders 100% of Ding Neng Holdings in exchange for shares of
common stock representing 85% of the common stock issued and outstanding
immediately following the closing (the “Acquisition”). After the Acquisition is
completed, the Company’s existing stockholders are expected to beneficially own
approximately 10.5% of the outstanding shares of the post-acquisition
entity.
Ding Neng
Holdings indirectly controls Fujian Zhangzhou Dingneng Bio-technology
Co., Ltd., a corporation organized under the laws of the PRC, which is an
variable interest entity that engages in the production, refinement and
distribution of bio-diesel fuel in southern China.
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
Consolidated
Financial Statements
For
The Years Ended June 30, 2010 and 2009
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
June
30,
2010
|
|
|
June
30,
2009
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
92,094
|
|
|
$
|
1,217,085
|
|
|
Current
assets of discontinued operations
|
|
|
103,822
|
|
|
|
13,662,598
|
|
|
Total
Current Assets
|
|
|
195,916
|
|
|
|
14,879,683
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets of discontinued operations
|
|
|
29,529
|
|
|
|
14,775,006
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
225,445
|
|
|
$
|
29,654,689
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
Current
liabilities of discontinued operations
|
|
$
|
809,861
|
|
|
$
|
9,490,359
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
809,861
|
|
|
|
9,490,359
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; 100,000,000 shares authorized;
40,000,000
shares issued and outstanding as of June 30, 2010 and 2009
|
|
|
40,000
|
|
|
|
40,000
|
|
|
Additional
paid-in capital
|
|
|
86,360
|
|
|
|
86,360
|
|
|
(Accumulated
deficit) retained earnings
|
|
|
(1,451,677
|
)
|
|
|
19,291,210
|
|
|
Accumulated
other comprehensive income
|
|
|
740,901
|
|
|
|
746,760
|
|
|
Total
Stockholders’ (deficiency) equity
|
|
|
(584,416
|
)
|
|
|
20,164,330
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
$
|
225,445
|
|
|
$
|
29,654,689
|
|
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
Year
Ended
June
30, 2010
|
|
|
Year
Ended
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
|
|
|
(20,742,887
|
)
|
|
|
9,177,601
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation loss
|
|
|
(5,859
|
)
|
|
|
(13,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
(20,748,746
|
)
|
|
$
|
9,164,203
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME PER SHARE FROM DISCONTINUED OPERATIONS, NET OF
TAX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
BASIC AND DILUTED
|
|
$
|
(0.52
|
)
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
BASIC AND DILUTED
|
|
|
40,000,000
|
|
|
|
40,000,000
|
|
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
YEARS
ENDED JUNE 30, 2010 AND 2009
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
(Accumulated
Deficit)
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Total
|
|
|
BALANCE,
JUNE 30, 2008
|
|
|
40,000,000
|
|
|
$
|
40,000
|
|
|
$
|
86,360
|
|
|
$
|
10,113,609
|
|
|
$
|
760,158
|
|
|
$
|
11,000,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,398
|
)
|
|
|
(13,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,177,601
|
|
|
|
-
|
|
|
|
9,177,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JUNE 30, 2009
|
|
|
40,000,000
|
|
|
$
|
40,000
|
|
|
$
|
86,360
|
|
|
$
|
19,291,210
|
|
|
$
|
746,760
|
|
|
$
|
20,164,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,859
|
)
|
|
|
(5,859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,742,887
|
)
|
|
|
-
|
|
|
|
(20,742,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
JUNE 30, 2010
|
|
|
40,000,000
|
|
|
$
|
40,000
|
|
|
$
|
86,360
|
|
|
$
|
(1,451,677
|
)
|
|
$
|
740,901
|
|
|
$
|
(584,416
|
)
|
CHINA
INSONLINE CORP.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Year
Ended
June
30, 2010
|
|
|
Year Ended
June
30, 2009
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
(loss) income from discontinued operations
|
|
$
|
(20,742,887
|
)
|
|
$
|
9,177,601
|
|
|
Adjustments
to reconcile net (loss) income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
1,381,744
|
|
|
|
440,011
|
|
|
Depreciation
|
|
|
61,848
|
|
|
|
106,992
|
|
|
Loss
(Gain) on disposal of fixed assets
|
|
|
9,606
|
|
|
|
(72,711
|
)
|
|
Deferred
tax provision (benefit)
|
|
|
61,798
|
|
|
|
(166,673
|
)
|
|
Provision
for doubtful accounts
|
|
|
62,292
|
|
|
|
26,397
|
|
|
(Gain)
on disposal of subsidiaries
|
|
|
(565,908
|
)
|
|
|
-
|
|
|
Impairment
of goodwill
|
|
|
4,473,787
|
|
|
|
-
|
|
|
Impairment
of software
|
|
|
9,290,464
|
|
|
|
-
|
|
|
Write-off
of prepayment
|
|
|
10,633,610
|
|
|
|
-
|
|
|
Changes
in operating assets and liabilities, net of effects of
acquisition:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
7,700,607
|
|
|
|
(1,085,023
|
)
|
|
Other
receivables
|
|
|
(597,987
|
)
|
|
|
5,055
|
|
|
Prepayments
and deposits
|
|
|
(15,017,986
|
)
|
|
|
(4,213,071
|
)
|
|
Accounts
payable
|
|
|
(150,364
|
)
|
|
|
138,353
|
|
|
Other
payables and accrued liabilities
|
|
|
(1,614,661
|
)
|
|
|
1,345,465
|
|
|
Taxes
payable
|
|
|
4,466,262
|
|
|
|
3,351,193
|
|
|
Deferred
revenue
|
|
|
-
|
|
|
|
(63,583
|
)
|
|
Net
cash provided by (used in) operating activities
|
|
|
(547,775
|
)
|
|
|
8,990,006
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Acquisition
of subsidiary, net of cash acquired
|
|
|
(1,840
|
)
|
|
|
(5,715,919
|
)
|
|
Repayment
from a former shareholder of a newly acquired subsidiary
|
|
|
-
|
|
|
|
1,019,759
|
|
|
Acquisition
of software
|
|
|
(727,121
|
)
|
|
|
(731,433
|
)
|
|
Prepayments
for software
|
|
|
-
|
|
|
|
(6,981,952
|
)
|
|
Acquisition
of fixed assets
|
|
|
-
|
|
|
|
(118,780
|
)
|
|
Proceeds
on disposal of fixed assets
|
|
|
7,509
|
|
|
|
130,563
|
|
|
Net
cash used in investing activities
|
|
|
(721,452
|
)
|
|
|
(12,397,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Advance
from a director
|
|
|
150,094
|
|
|
|
71,455
|
|
|
Net
cash provided by financing activities
|
|
|
150,094
|
|
|
|
71,455
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(1,119,133
|
)
|
|
|
(3,336,301
|
)
|
|
Effect
of exchange rate changes on cash
|
|
|
(5,858
|
)
|
|
|
(14,467
|
)
|
|
Cash
and cash equivalents, at beginning of the year
|
|
|
1,217,085
|
|
|
|
4,567,853
|
|
|
CASH
AND CASH EQUIVALENTS, END OF THE YEAR
|
|
$
|
92,094
|
|
|
$
|
1,217,085
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income
taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
and Principal Activities
China
INSOnline Corp. (“
CHIO
”),
formerly known as Dexterity Surgical, Inc. (“
Dexterity Surgical
”) was incorporated
on December 23, 1988 as a Delaware corporation and commenced operations on
January 1, 1989. In August 1992, Dexterity Surgical completed an initial public
offering of its common stock par value $0.001 per share (“
Common Stock
”), which at such time was
trading on The Over-The-Counter Bulletin Board. In March 2008, Dexterity
Surgical, Inc. changed its name to China INSOnline Corp. On July 1,
2008, CHIO’s Common Stock was approved by the NASDAQ to trade on the NASDAQ
Capital Market under the symbol “CHIO”.
On
December 18, 2007, Dexterity Surgical, Rise and Grow Limited (“
Rise & Grow
”) and Newise Century
Inc., the sole stockholder of Rise & Grow (the “
Shareholder
”) consummated a share
exchange agreement (the “
Share Exchange
Agreement
”) pursuant to which the Shareholder transferred to Dexterity
Surgical, and Dexterity Surgical acquired from the Shareholder, all of the
capital stock of Rise & Grow (the “
Shares
”), which Shares constitute 100%
of the issued and outstanding capital stock of Rise & Grow, in exchange for
26,400,000 shares of Common Stock, which shares now constitute 66% of the fully
diluted outstanding shares of Common Stock. This share exchange
transaction resulted in the Shareholder obtaining a majority voting interest in
Dexterity Surgical. Generally accepted accounting principles require
that a company whose shareholders retain the majority interest in a combined
business be treated as the acquirer for accounting purposes, resulting in a
reverse acquisition. Accordingly, the share exchange transaction has
been accounted for as a recapitalization of Dexterity Surgical.
Rise
& Grow was formed on February 10, 2006 as a Hong Kong limited
company. Zhi Bao Da Tong (Beijing) Technology Co., Ltd (“
ZBDT
”), a company registered in the
People’s Republic of China (the “
PRC
” or “
China
”), was established and
incorporated by Rise & Grow and commenced business on September 6,
2007. Rise & Grow’s sole business is to act as a holding company
for ZBDT.
ZBDT was
formed by Rise & Grow for the purpose of developing computer and network
software and related products and to promote the development of high-tech
industries in the field of Chinese information technology. In
compliance with the PRC’s foreign investment restrictions on Internet
information services and other laws and regulations, ZBDT conducts all of our
Internet information and media services and advertising in China through ZYTX, a
domestic Variable Interest Entity (“
VIE
”). It does this by
controlling Beijing ZYTX Technology Co., Ltd (“
ZYTX
”), through an Exclusive Technical
Consulting and Service Agreement (the “
Consulting Agreement
”) and related
transaction documents dated as of September 28, 2007 (collectively, the “
Service Agreements
”). ZBDT
did not conduct any business for the Company and was sold to third party in
connection with the June 30, 2010 transaction.
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
ZYTX, a
company registered in the PRC on October 8, 2006, is an Internet e-business
development, online advertisement publishing and related online servicing
company, which focuses on the PRC insurance industry. With localized
web sites targeting Greater China, ZYTX provides a platform through its web
site, www.soobao.cn, to consumers, agents and insurance companies for online
transaction, advertising, online inquiry, news circulation, statistic analysis
and software development. ZYTX also provides online insurance agent
services including car, property and life insurance to customers in the
PRC.
According
to the Consulting Agreement, ZBDT has the exclusive right to provide technical
consulting and other services to ZYTX, effectively restricting and controlling
the operations of ZYTX. The terms of the agreement granted rights to
ZBDT to solely and exclusively possess all intellectual property of ZYTX which
comprise the core value and assets of ZYTX (ultimately, solely and exclusively
possessed by the Company).
On
October 28, 2008, Rise & Grow and ZYTX acquired Guang Hua Insurance Agency
Company Limited (“
GHIA
”), a
limited liability company organized under the laws of the PRC, through a share
exchange which resulting in Rise & Grow obtaining 100% of the voting and
beneficial interest in GHIA.
On April
2, 2009, Zhi Bao Da Tong (Beijing) Technology Co., Ltd (“
ZBDT
”) changed its name into New
Fortune Associate (Beijing) Information Technology Co Ltd. (“
NFA
”).
On
January 14, 2010, the Company acquired a Hong Kong limited company, Ever Trend
Investment Limited (“
ETI
”), for
investment holding purpose. Before the acquisition, ETI was dormant
and has no business activity.
On March
25, 2010, Run Ze Yong Cheng (Beijing) Technology Co. Limited (“
RZYC
”), a company registered in the
PRC, was established and incorporated by ETI as a wholly foreign owned
enterprise for future business development purposes. ETI’s sole
business is to act as a holding company for RZYC. RZYC was formed by
ETI for the purpose of future business development. As at June 30,
2010, RZYC has not commenced any business operation period.
In
compliance with the PRC’s foreign investment restrictions on insurance agent
services and other laws and regulations, RZYC acquired Beijing San Teng Da Fei
Technology Development Co., Ltd. (“
STDF
”), a company registered in the
PRC on December 3
,
2009 in order to conduct insurance related business in
China. STDF is a variable interest entity of RZYC through an
Exclusive Technical Consulting and Service Agreement (the “
STDF Consulting Agreement
”) in which
RZYC has exclusive rights to provide technical consulting services to STDF as
well as possess all intellectual property of STDF which comprise the core value
and assets of STDF. In addition, the equity purchase agreement by and
between the owners of STDF gave RZYC the exclusive and irrevocable right to
acquire 100% of the equity interests of STDF as well as the right
to control the operating activities and the shareholding structure of
STDF.
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
December 2009, the Financial Accounting Standards Board (“
FASB
”) issued Accounting Standards
Update (“
ASU
”) 2009-17,
“Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities” (“
ASU 2009-17
”). Effective
February 1, 2010, the Company adopted ASU 2009-17, which requires an
enterprise to perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a VIE. This
analysis identifies the primary beneficiary of a variable interest entity as the
enterprise that has (1) the power to direct the activities of a variable
interest entity that most significantly impact the entity’s economic performance
and (2) the obligation to absorb losses of the entity that could
potentially be significant to the variable interest entity or the right to
receive benefits from the entity that could potentially be significant to the
variable interest entity. In addition, the required changes provide guidance on
shared power and joint venture relationships, remove the scope exemption for
qualified special purpose entities, revise the definition of a variable interest
entity, and require additional disclosures. The Company assesses the
terms contained in the Consulting Agreement and Service Agreements between ZBDT
and ZYTX, the agreements between RZYC and STDF and determines that ZYTX and STDF
are VIEs.
On June
23, 2010, GHIA was transferred to STDF from ZYTX and on June 30, 2010, the
Company entered into an agreement with a third party to dispose Rise &
Grow and its subsidiaries NFA and its VIE ZYTX for a cash consideration of
US$100,000.
The
Company accounted for the winding down of the business as discontinued
operations as it meets the criteria set forth in FASB Codifications (“
ACS
”) 205 “Discontinued
Operations.”
The
consolidated financial statements included the accounts of CHIO and the
following subsidiaries. Inter-company accounts and transactions
have been eliminated in consolidation:
Rise
& Grow – 100% subsidiary of CHIO during the year ended June 30, 2010 but was
disposed on June 30, 2010;
ETI –
100% subsidiary of CHIO;
NFA –
100% subsidiary of Rise & Grow during the year ended June 30, 2010 but was
disposed together with Rise & Grow on June 30, 2010;
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
RZYC –
100% subsidiary of ETI;
ZYTX
– a VIE of NFA. ZYTX was disposed together with Rise & Grow
and NFA on June 30, 2010;
STDF
– a VIE of RZYC.
GHIA –
100% subsidiary of ETI through STDF to act as legal owner in China.
Inter-company
accounts and transactions have been eliminated in consolidation.
The
Company ceased all of its core operations by June 30, 2010. The financial
results have been classified as discontinued operations in the consolidated
statements of operations for all periods presented. The assets and liabilities
of this business are reflected as assets and liabilities of discontinued
operations in the consolidated balance sheets for all periods presented. See
Note 5 for additional information regarding discontinued
operations.
2.
Going Concern
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company ceased all operations,
experienced significant operating losses and has negative capital deficiency as
of June 30, 2010. This raised substantial doubt about its ability to continue as
a going concern. The Company's existence is dependent upon management's ability
to obtain additional financings. The Company is actively pursuing
additional capital injections from potential investors as well as seeking other
growth opportunities by way of merger or acquisition. In addition,
the Chairman of the Company will continue to provide necessary funding in order
to enable the Company to continue operations for the next twelve months. The
accompanying consolidated financial statements do not include any adjustments
that might result from this uncertainty.
3.
Summary of Significant Accounting Policies
(a)
Use of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those
estimates.
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(b)
Principles of
consolidation
Pursuant
to ASC Topic 810, we are required to include in our consolidated financial
statements the financial statements of variable interest entities. ASC Topic 810
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss for the variable interest
entity or is entitled to receive a majority of the variable interest entity’s
residual returns. Variable interest entities are those entities in which we,
through contractual arrangements, bear the risk of, and enjoy the rewards
normally associated with ownership of the entity, and therefore we are the
primary beneficiary of the entity.
The
consolidated financial statements include the accounts of ZYTX (disposed in June
2010) and GHIA since they are deemed variable interest entities and the Company
is the primary beneficiary.
(c) Fair
Value of Financial Instruments
The
Company adopted ASC 820, "Fair Value Measurements" on January 1, 2008 for
all financial assets and liabilities and nonfinancial assets and liabilities
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). ASC 820 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. ASC 820 defines fair value as the price that would be received
from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be
recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
The
Company’s financial instruments include prepayment and deposits, other payables
and accrued liabilities, amount due to director, income tax payable. We
estimated that the carrying amount approximates fair value due to their
short-term nature. The Company does not have any assets or liabilities measured
at fair value on a recurring or a non-recurring basis.
(d)
Cash and Cash Equivalents
The
Company considers all highly liquid investments purchased with original maturity
of three months or less to be cash and cash equivalents.
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Revenue
Recognition
The
Company ceased all of its core operations as of June 30,
2010. Historically, the Company earned revenues primarily through
online advertising and software development. As a result of
management’s decision to wind down all of its business operations during fiscal
year 2010, all revenues are included in the Income/loss from discontinued
operations on the statements of operations for all period
presented.
Advertising
revenues are derived mainly from online advertising arrangements, which allow
advertisers to place advertisements on particular areas of the Company’s web
sites, in particular formats and over particular periods of
time. Such arrangements have generally included some combination of
website construction service (service fee is recognized when the web site is
complete); Website advertising (revenues recognized ratably over the display
period of the advertisement, typically one year), and website maintenance
services (revenue is recognized ratably over the contract period).
Software
development revenue is recognized in accordance with ASC 985-605, "Software,"
when the outcome of a contract for software development can be estimated
reliably, contract revenue and costs are charged to income by reference to the
stage of completion of the contract activity at the balance sheet date, as
measured by the proportion that costs incurred to date bear to estimated total
costs for each contract. When the outcome of a contract cannot be
estimated reliably, contract costs are recognized as an expense in the period in
which they are incurred. Contract revenue is recognized to the extent of
contract costs incurred that it is probable will be
recoverable. Where it is probable that the total contract costs will
exceed total contract revenue, the expected loss is recognized as an expense
immediately.
(f)
Foreign Currency Translation
The
accompanying financial statements are presented in United States
dollars. The functional currencies of the Company are the Renminbi
(“
RMB
”) and the Hong Kong Dollar
(“
HKD
”). The
financial statements are translated into United States Dollars (“
US
$” or “
$
”) from RMB and US$ from HKD at
years-end exchange rates as to assets and liabilities and average exchange rates
as to revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred.
|
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
|
Period
end RMB: US$ exchange rate
|
|
6.8086
|
|
|
6.8319
|
|
|
Period
average RMB: US$ exchange rate
|
|
6.8367
|
|
|
6.8072
|
|
|
Period
end HKD: US$ exchange rate
|
|
7.7847
|
|
|
7.7501
|
|
|
Period
average HKD: US$ exchange rate
|
|
7.7614
|
|
|
7.7646
|
|
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(g)
Income Taxes
The Company accounts for income taxes
using the asset and liability method. Deferred taxes are provided for the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future utilization is uncertain.
(h)
Comprehensive Income
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as
components of comprehensive income should be reported in a financial statement
that is presented with the same prominence as other financial statements. The
Company’s current components of comprehensive income are net income and the
foreign currency translation adjustment.
(i) Loss/Earnings
Per Share
Basic
loss/earnings per share are computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
There were no dilutive securities outstanding for the years
presented.
(j)
Goodwill and Intangible Assets
In accordance with
ASC 805
, “Business Combination” and FASB ASC
Topic 350, “Intangibles-Goodwill and Other”, the Company accounts for business
combinations using the purchase method of accounting and accordingly, the assets
and liabilities of the acquired entities are recorded at their estimated fair
values at the acquisition date. Goodwill represents the excess of the purchase
price over the fair value of net assets, including the amount assigned to
identifiable intangible assets. Pursuant to this guidance, the Company does not
amortize the goodwill balance and instead, performs an annual impairment review
to assess the fair value of goodwill over its carrying value. Identifiable
intangible assets with finite lives are amortized over their useful lives.
Goodwill is tested annually for impairment during the fourth quarter or earlier
upon the occurrence of certain events or substantive changes in
circumstances.
The Company performs an impairment
review of its indefinite-lived intangible assets when events occur which
trigger the need for an earlier impairment review. In connection with
the winding down all of the Company
’
s operations and the sales of
subsidiaries, the Company recognized impairment charge of $4,473,787
on goodwill derived from the acquisition of ZYTX. It also recognized
impairment charges of $ 9,290,464 on software.
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(k)
Segment
Historically
the Company operated in three business segments, including software development,
online insurance advertising, and insurance agency. As a result of management’s
decision to wind down its operations in 2010, all segment operations are
presented as discontinued operations for the years ended June 30, 2010 and
2009.
(l)
Reclassifications
The
Company has reclassified certain balances in the prior year on the balance sheet
and income statement primarily related to discontinued operations to conform to
the current year presentation. The amounts reclassified had no effect on
retained earnings or net income (Also see Note 5).
4.
Recent Accounting Pronouncements
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and liabilities
measured under Level 3 of the fair value measurement hierarchy. This guidance is
effective for the Company beginning July 1, 2010. The Company does not expect
the adoption will have an impact on its consolidated financial position or
results of operations. The Company is subject to the examination by PRC tax
authorities for fiscal year 2009 and 2010.
5.
Discontinued Operations
The
assets and liabilities from discontinued operations at June 30, 2010 and 2009
was as follows:
|
|
|
June
30,
2010
|
|
|
June
30,
2009
|
|
|
ASSETS
OF DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
$
|
-
|
|
|
$
|
7,764,537
|
|
|
Prepayments
and deposits
|
|
|
3,822
|
|
|
|
5,428,848
|
|
|
Other
receivable
|
|
|
100,000
|
|
|
|
2,385
|
|
|
Deferred
taxes
|
|
|
-
|
|
|
|
466,828
|
|
|
Total
current assets of discontinued operations
|
|
|
103,822
|
|
|
|
13,662,598
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
|
29,529
|
|
|
|
212,591
|
|
|
Software,
net
|
|
|
-
|
|
|
|
2,963,136
|
|
|
Prepayments
for software
|
|
|
-
|
|
|
|
6,981,952
|
|
|
Goodwill
|
|
|
-
|
|
|
|
4,473,787
|
|
|
Deposits
|
|
|
-
|
|
|
|
78,093
|
|
|
Deferred
taxes
|
|
|
-
|
|
|
|
65,447
|
|
|
Total
non-current assets of discontinued operations
|
|
|
29,529
|
|
|
|
14,775,006
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS OF DISCONTINUED OPERATIONS
|
|
|
133,351
|
|
|
|
28,437,604
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
OF DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
-
|
|
|
$
|
150,514
|
|
|
Other
payables and accrued liabilities
|
|
|
399,956
|
|
|
|
2,735,625
|
|
|
Amount
due to director
|
|
|
403,600
|
|
|
|
253,506
|
|
|
Income
taxes payable
|
|
|
6,305
|
|
|
|
6,260,070
|
|
|
Deferred
taxes
|
|
|
-
|
|
|
|
90,644
|
|
|
TOTAL
LIABILITIES OF DISCONTINUED OPERATIONS
|
|
$
|
809,861
|
|
|
$
|
9,490,359
|
|
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
6.
Related Parties Transactions
During
the years ended June 30, 2010 and 2009
, the Chairman of the Company, Mr.
Wang Zhenyu, made advances to the Company for operational needs. At
June 30, 2010 and 2009, the amount outstanding was $403,600 and $253,506,
respectively. The outstanding amounts are non-interest bearing,
unsecured and have no fixed repayment terms.
During
the year ended June 30, 2009, ZYTX entered into the agreement with Beijing
Enterprises UniCard Co., Ltd. ("
UniCard
"), which Mr. Zhenyu Wang, the
Chairman of the Company is also the Chairman of UniCard. For the year
ended June 30, 2009, the Company rented office space to UniCard for $131,758 and
the Company also sold fixed assets to UniCard for $130,563.
7.
Taxes
Corporation
Income Tax (“
CIT
”)
Historical
the Company did not generate any taxable income outside of the PRC. The
Company’s operational subsidiary ZYTX was incorporated in PRC. The
Management does not expect to repatriate ZYTX’s net income back to US in the
near future; therefore ZYTX is governed by the Income Tax Law of the People’s
Republic of China concerning the private-run enterprises. The Company has not
recorded a provision for U.S. federal income taxes for the years ended June 30,
2010 and 2009 due to the net operating loss carry forward in the United States.
The Company's tax return for fiscal tax year ending December 31, 2009 is subject
to examination by federal and state tax authorities.
CHINA INSONLINE
CORP.
CHINA
INSONLINE AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
March 16, 2007, the National People’s Congress of China approved the new
Corporate Income Tax Law of the People’s Republic of China (the “
New CIT Law
”), which was effective
from January 1, 2008. Prior to January 1, 2008, the CIT
rate applicable to the Company’s subsidiary in the PRC was 33%. As from January
1, 2008, the applicable CIT rate for the Company’s subsidiaries and VIEs
incorporated in PRC, which include NFA, ZYTX, RZYC, STDF and GHIA are
25%.
In
connection with the sales of three subsidiaries, Rise & Grow, NFA and ZYTX
on June 28, 2010, the third party buyer agreed to assume $11,083,398 of income
tax payable, along with $379,833 of deferred tax assets. The Company
had $6,305 of income tax payable related to GHIA which remained on the books and
included in the current liabilities of discontinued operations on the balance
sheet as of June 30, 2010.
8.
Commitments and Contingency
(a)
Lease Commitments
The Company’s office operating lease
will expire in 2011 with the remaining lease payment of approximate
$18,506.
(b)
Pledge of common stock by a significant shareholder
Mr.
Zhenyu Wang, a significant shareholder, entered into a loan agreement dated
January 8, 2010 with Argyll Investments, LLC, and pledged 2,000,000 common stock
of the Company to secure a personal loan of $554,400 at interest rate of 4% per
annum for 36 months, full recourse note.
Mr.
Zhenyu Wang, a significant shareholder, entered into a loan agreement dated
February 16, 2010 with Argyll Investments, LLC, and pledged 2,000,000 common
stock of the Company to secure a personal loan of $705,600 at interest rate of
4% per annum for 36 months, full recourse note.
9.
Subsequent event
On
September 27, 2010, the Company entered into a letter of intent with a PRC
company to consummate a reverse acquisition within one year, subject to due
diligence.
DING
NENG HOLDINGS LIMITED
AND
SUBSIDIARIES
Consolidated
Financial Statements
For
the Nine Months Ended September 30, 2010 and 2009
(Unaudited)
and
For the Fiscal Years
Ended December 31, 2009 and 2008
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Ding Neng
Holdings Limited
British
Virgin Islands
We have
audited the accompanying consolidated balance sheets of Ding Neng Holdings
Limited (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income, changes in
stockholders’ equity, and cash flows for the years ended December 31, 2009 and
2008. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009
and 2008 and the results of operations and cash flows for the years ended
December 31, 2009 and 2008 in conformity with accounting principles generally
accepted in the United States of America.
/s/
MALONEBAILEY, LLP
www.malonebailey.com
Houston,
Texas
November
12, 2010
DING
NENG HOLDINGS LIMITED
CONSOLIDATED
BALANCE SHEETS
|
|
|
September
30,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,683,673
|
|
|
$
|
85,248
|
|
|
$
|
77,487
|
|
|
Accounts
receivable, net
|
|
|
2,615,245
|
|
|
|
1,626,414
|
|
|
|
1,181,654
|
|
|
Inventories
|
|
|
895,064
|
|
|
|
721,042
|
|
|
|
398,040
|
|
|
Prepaid
expenses and other current assets
|
|
|
1,244,324
|
|
|
|
203,842
|
|
|
|
131,186
|
|
|
Total
Current Assets
|
|
|
7,438,306
|
|
|
|
2,636,546
|
|
|
|
1,788,367
|
|
|
Restricted
cash
|
|
|
40,431
|
|
|
|
-
|
|
|
|
-
|
|
|
Property
and equipment, net
|
|
|
3,139,449
|
|
|
|
2,933,903
|
|
|
|
3,180,346
|
|
|
Prepayment
on land use rights and forests
|
|
|
2,323,494
|
|
|
|
1,220,690
|
|
|
|
-
|
|
|
Intangible
assets, net
|
|
|
181,276
|
|
|
|
180,524
|
|
|
|
184,364
|
|
|
|
|
$
|
13,122,956
|
|
|
$
|
6,971,663
|
|
|
$
|
5,153,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable - trade
|
|
$
|
519,801
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Accrued
liabilities
|
|
|
10,832
|
|
|
|
8,806
|
|
|
|
52,174
|
|
|
Taxes
payable
|
|
|
617,218
|
|
|
|
-
|
|
|
|
65,202
|
|
|
Short-term
notes payable
|
|
|
449,100
|
|
|
|
-
|
|
|
|
-
|
|
|
Due
to related parties
|
|
|
1,075,750
|
|
|
|
2,646,615
|
|
|
|
3,030,961
|
|
|
Payable
to former shareholder
|
|
|
-
|
|
|
|
253,644
|
|
|
|
-
|
|
|
Total
Current Liabilities
|
|
|
2,672,701
|
|
|
|
2,909,065
|
|
|
|
3,148,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $.1 par value, 50,000 shares authorized,
|
|
|
|
|
|
|
|
|
|
|
50,000
shares issued and outstanding
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
Additional
paid-in capital
|
|
|
953,539
|
|
|
|
953,539
|
|
|
|
953,539
|
|
|
Statutory
reserves
|
|
|
479,270
|
|
|
|
305,568
|
|
|
|
99,909
|
|
|
Retained
earnings
|
|
|
8,771,492
|
|
|
|
2,750,115
|
|
|
|
899,181
|
|
|
Accumulated
other comprehensive income
|
|
|
240,954
|
|
|
|
48,376
|
|
|
|
47,111
|
|
|
Total
Stockholders' Equity
|
|
|
10,450,255
|
|
|
|
4,062,598
|
|
|
|
2,004,740
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
13,122,956
|
|
|
$
|
6,971,663
|
|
|
$
|
5,153,077
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DING
NENG HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
|
|
|
For
the Nine Months Ended
|
|
|
For
the Year Ended
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
24,443,807
|
|
|
$
|
11,488,352
|
|
|
$
|
15,289,379
|
|
|
$
|
9,038,313
|
|
|
Cost
of Revenue
|
|
|
16,326,079
|
|
|
|
9,151,977
|
|
|
|
12,298,954
|
|
|
|
7,389,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
8,117,728
|
|
|
|
2,336,375
|
|
|
|
2,990,425
|
|
|
|
1,648,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
214,376
|
|
|
|
158,672
|
|
|
|
250,426
|
|
|
|
104,244
|
|
|
Research
and development
|
|
|
618,814
|
|
|
|
357,097
|
|
|
|
556,071
|
|
|
|
223,057
|
|
|
General
and administrative
|
|
|
469,066
|
|
|
|
115,702
|
|
|
|
185,394
|
|
|
|
102,350
|
|
|
Total
operating expenses
|
|
|
1,302,256
|
|
|
|
631,471
|
|
|
|
991,891
|
|
|
|
429,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Operations
|
|
|
6,815,472
|
|
|
|
1,704,904
|
|
|
|
1,998,534
|
|
|
|
1,219,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
6,569
|
|
|
|
1,554
|
|
|
|
2,723
|
|
|
|
1,100
|
|
|
Interest
expense
|
|
|
(4,375
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
income (expenses)
|
|
|
262,424
|
|
|
|
55,450
|
|
|
|
55,336
|
|
|
|
(340
|
)
|
|
Total
Other Income (Expenses)
|
|
|
264,618
|
|
|
|
57,004
|
|
|
|
58,059
|
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
|
7,080,090
|
|
|
|
1,761,908
|
|
|
|
2,056,593
|
|
|
|
1,219,975
|
|
|
Income
taxes
|
|
|
885,011
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net
Income
|
|
$
|
6,195,079
|
|
|
$
|
1,761,908
|
|
|
$
|
2,056,593
|
|
|
$
|
1,219,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
192,578
|
|
|
|
1,322
|
|
|
|
1,265
|
|
|
|
36,070
|
|
|
Comprehensive
Income
|
|
$
|
6,387,657
|
|
|
$
|
1,763,230
|
|
|
$
|
2,057,858
|
|
|
$
|
1,256,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Share, Basic and Diluted
|
|
$
|
123.90
|
|
|
$
|
35.24
|
|
|
$
|
41.13
|
|
|
$
|
24.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding, Basic and Diluted
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
50,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DING
NENG HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND YEARS ENDED DECEMBER 31, 2009 AND
2008
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Statutory
|
|
|
Retained
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Reserves
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
50,000
|
|
|
$
|
5,000
|
|
|
$
|
363,470
|
|
|
$
|
11,041
|
|
|
$
|
-
|
|
|
$
|
(220,885
|
)
|
|
$
|
158,626
|
|
|
Contribution
of capital
|
|
|
|
|
|
|
|
|
|
|
590,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590,069
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,070
|
|
|
|
|
|
|
|
|
|
|
|
36,070
|
|
|
Allocation
of statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,909
|
|
|
|
(99,909
|
)
|
|
|
-
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,219,975
|
|
|
|
1,219,975
|
|
|
Balance
at December 31, 2008
|
|
|
50,000
|
|
|
|
5,000
|
|
|
|
953,539
|
|
|
|
47,111
|
|
|
|
99,909
|
|
|
|
899,181
|
|
|
|
2,004,740
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,265
|
|
|
|
|
|
|
|
|
|
|
|
1,265
|
|
|
Allocation
of statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205,659
|
|
|
|
(205,659
|
)
|
|
|
-
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,056,593
|
|
|
|
2,056,593
|
|
|
Balance
at December 31, 2009
|
|
|
50,000
|
|
|
|
5,000
|
|
|
|
953,539
|
|
|
|
48,376
|
|
|
|
305,568
|
|
|
|
2,750,115
|
|
|
|
4,062,598
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192,578
|
|
|
|
|
|
|
|
|
|
|
|
192,578
|
|
|
Allocation
of statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,702
|
|
|
|
(173,702
|
)
|
|
|
-
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,195,079
|
|
|
|
6,195,079
|
|
|
Balance
at September 30, 2010 (Unaudited)
|
|
|
50,000
|
|
|
$
|
5,000
|
|
|
$
|
953,539
|
|
|
$
|
240,954
|
|
|
$
|
479,270
|
|
|
$
|
8,771,492
|
|
|
$
|
10,450,255
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DING
NENG HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
For
the Nine Months Ended
|
|
|
For
the Year Ended
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
6,195,079
|
|
|
$
|
1,761,908
|
|
|
$
|
2,056,593
|
|
|
$
|
1,219,975
|
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
216,533
|
|
|
|
205,779
|
|
|
|
274,523
|
|
|
|
269,805
|
|
|
Amortization
expense
|
|
|
2,888
|
|
|
|
2,878
|
|
|
|
3,838
|
|
|
|
3,774
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(955,571
|
)
|
|
|
530,774
|
|
|
|
(444,760
|
)
|
|
|
(1,181,654
|
)
|
|
Inventories
|
|
|
373,913
|
|
|
|
(468,281
|
)
|
|
|
(323,002
|
)
|
|
|
(48,052
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(1,036,505
|
)
|
|
|
(450,844
|
)
|
|
|
(72,468
|
)
|
|
|
7,189
|
|
|
Accounts
payable
|
|
|
519,801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(147,620
|
)
|
|
Accrued
liabilities
|
|
|
1,846
|
|
|
|
607,421
|
|
|
|
(43,368
|
)
|
|
|
(1,268,626
|
)
|
|
Taxes
payable
|
|
|
617,410
|
|
|
|
34,648
|
|
|
|
(65,390
|
)
|
|
|
90,646
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
5,935,394
|
|
|
|
2,224,283
|
|
|
|
1,385,966
|
|
|
|
(1,054,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(40,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for land use rights and forests
|
|
|
(1,047,900
|
)
|
|
|
-
|
|
|
|
(1,220,690
|
)
|
|
|
-
|
|
|
Cash
paid for construction in progress
|
|
|
(315,160
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Purchases
of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,231
|
)
|
|
|
-
|
|
|
Net
cash used in investing activities
|
|
|
(1,403,491
|
)
|
|
|
-
|
|
|
|
(1,248,921
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from capital contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
590,069
|
|
|
Repayment
of due to related parties
|
|
|
(3,157,690
|
)
|
|
|
(413,687
|
)
|
|
|
(453,442
|
)
|
|
|
-
|
|
|
Repayment
of payable to former shareholder
|
|
|
(258,831
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Borrowing
from related parties
|
|
|
948,765
|
|
|
|
88,020
|
|
|
|
322,740
|
|
|
|
443,914
|
|
|
Borrowing
from short-term notes payable
|
|
|
449,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net
cash used in financing activities
|
|
|
(2,018,656
|
)
|
|
|
(325,667
|
)
|
|
|
(130,702
|
)
|
|
|
1,033,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
85,178
|
|
|
|
1,480
|
|
|
|
1,418
|
|
|
|
34,269
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,598,425
|
|
|
|
1,900,096
|
|
|
|
7,761
|
|
|
|
13,689
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
85,248
|
|
|
|
77,487
|
|
|
|
77,487
|
|
|
|
63,798
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,683,673
|
|
|
$
|
1,977,583
|
|
|
$
|
85,248
|
|
|
$
|
77,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
430,612
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Interest
paid
|
|
$
|
4,375
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of current year income to statutory reserve
|
|
$
|
173,702
|
|
|
$
|
103,512
|
|
|
$
|
205,659
|
|
|
$
|
99,909
|
|
|
Reclassification
of amount due to related party to due to former
shareholder
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
253,644
|
|
|
$
|
-
|
|
|
Contribution
of fixed assets by related parties
|
|
$
|
50,748
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Ding
Neng Holdings Limited and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
1 - DESCRIPTION OF BUSINESS AND ORGANIZATION
The
consolidated financial statements consist of the financial statements of Ding
Neng Holdings Limited (“Ding Neng BVI
”
, the
“
Company
”
), Ding Neng
Bio-Technology Co., Limited (“Ding Neng HK”), Zhangzhou Fuhua Biomass Energy
Technology Co., Ltd. (“Fuhua”), and Fujian Zhangzhou Ding Neng Bio-Technology
Ltd. (“Ding Neng Zhangzhou”).
Ding Neng
Holdings Limited was incorporated under the laws of British Virgin Islands on
October 20, 2010. Ding Neng BVI has 50,000 common shares authorized with $.10
par value each and 50,000 shares issued and outstanding.
Ding
Neng HK was incorporated under the laws of Hong Kong, People’s Republic of China
(“PRC”) on September 10, 2010. Ding Neng HK has 10,000 common shares authorized
with HK$1.00 par value each and 10,000 shares issued and outstanding.
Ding
Neng HK is wholly-owned by Ding Neng BVI.
Fuhua was
incorporated under the laws of the PRC on November 2, 2010 with registered
capital of HK$3,500,000 by Ding Neng HK. Fuhua is a wholly owned foreign
enterprise organized under the laws of the PRC, which has, through various
contractual agreements, management control and the rights to the profits and
losses of Ding Neng Zhangzhou.
Ding Neng
Zhangzhou is located in Zhangzhou city, Fujian Province, PRC and was
incorporated under the laws of the PRC on December 8, 2006 with registered
capital of USD $959,000 (HKD 7,476,600). Ding Neng Zhangzhou engages in the
production, refinement and distribution of bio-diesel fuel in Southern
China.
In
November 2010, Fuhua entered into a Consulting Service Agreement which
entitles Fuhua to substantially all of the economic benefits of Ding Neng
Zhangzhou in consideration of services provided by Fuhua to Ding Neng
Zhangzhou. In addition, Fuhua entered into certain agreements with each of
Xinfeng Nie, Sanfu Huang, and Shunlong Hu (the “Ding Neng Zhangzhou
shareholders”), including an Option Agreement allowing Fuhua to
acquire the shares of Ding Neng Zhangzhou as permitted by PRC laws, a Voting
Rights Proxy Agreement that provides Fuhua with the voting rights of the
Ding Neng Zhangzhou shareholders and an Equity Pledge Agreement that pledges the
shares in Ding Neng Zhangzhou to Fuhua. Effective control of Ding Neng Zhangzhou
was transferred to Fuhua through these series of contractual arrangements
without transferring legal ownership in Ding Neng Zhangzhou to Fuhua (the
“Reorganization”). As a result, Ding Neng Zhangzhou became a variable interest
entity (“VIE”) and is included in the consolidated group.
This VIE
structure provides Fuhua, a wholly-owned subsidiary of Ding Neng HK, with
control over the operations and benefits of Ding Neng Zhangzhou without having a
direct equity ownership in Ding Neng Zhangzhou.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
preparation
The
accompanying consolidated financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States
of America. The consolidated financial statements include the accounts of the
Company, its subsidiaries and Ding Neng Zhangzhou, the VIE. All significant
inter-company balances and transactions, including those of the Ding Neng
Zhangzhou, the VIE, have been eliminated in
consolidation.
The
reorganization has been accounted for as a common control transaction and a
recapitalization of the subsidiaries with retroactive effect in the accompanying
financial statements. The financial statements have been prepared as if the
existing corporate structure had been in existence throughout all periods and
the reorganization had occurred as of the beginning of the earliest period
presented in the accompanying financial statements.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. (“GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Future results could be materially affected if actual results
were to differ from these estimates and assumptions.
Risk and
uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
foreign currency exchange rates and the volatility of public
markets.
Concentration of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade receivables. As of
September 30, 2010, December 31, 2009 and 2008, substantially all of the
Company’s cash were held by major financial institutions located in the PRC,
which management believes are of high credit quality. Most of the Company’s
sales are credit sales which are primarily to customers whose ability to pay is
dependent on the industry economies prevailing in their respective areas;
however, concentration of credit risk with respect to trade accounts receivable
is limited due to generally short payment terms. The Company also performs
ongoing credit evaluations of its customers to help further reduce credit
risks.
Fair value of financial
instruments
The
Company adopted ASC 820 “Fair Value Measurements,” which defines fair value,
establishes a three-level valuation hierarchy for disclosures of fair value
measurement and enhances disclosure requirements for fair value measures.
Current assets and current liabilities qualified as financial instruments and
management believes their carrying amounts are a reasonable estimate of fair
value because of the short period of time between the origination of such
instruments and their expected realization and, if applicable, their current
interest rate is equivalent to interest rates currently
available. The three levels are defined as follow:
|
|
·
|
Level 1 — inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.
|
|
|
·
|
Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the assets or
liability, either directly or indirectly, for substantially the full term
of the financial
instruments.
|
|
|
·
|
Level 3 — inputs to the valuation
methodology are unobservable and significant to the fair
value.
|
As of the
balance sheet date, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective period-ends. Determining which
category an asset or liability falls within the hierarchy requires significant
judgment. The Company evaluates the hierarchy disclosures each
quarter.
Cash and cash
equivalents
Cash and
cash equivalents include cash on hand, bank deposits and highly liquid
investments with an original maturity of three months or less when
purchased.
Accounts
receivable
Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for uncollectible accounts, as needed.
The
allowance on uncollectible accounts receivable reflects management’s best
estimate of probable losses determined principally on the basis of historical
experience. The allowance for uncollectible accounts receivable is determined
primarily on the basis of management’s best estimate of probable losses,
including specific allowances for known troubled accounts. All accounts or
portions thereof deemed to be uncollectible or to require an excessive
collection cost are written off to the allowance for uncollectible accounts
receivable. When facts subsequently become available to indicate that the
amount provided as the allowance was incorrect, an adjustment which is
classified as a change in estimate is made.
Inventories
Inventories
consist of finished goods and raw materials. Inventories are valued at the lower
of cost, as determined on a first-in first-out basis, or market. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. Management writes
down the inventories to market value if it is below cost. Management also
regularly evaluates the composition of its inventories to identify slow-moving
and obsolete inventories to determine if valuation allowance is required. Costs
of raw material inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Finished goods
are comprised of direct materials, direct labor, and an appropriate proportion
of overhead.
Property and
equipment
Property
and equipment are initially recognized and recorded at cost. Gains or losses on
disposals are reflected as gain or loss in the period of disposal. The cost of
improvements that extend the life of property and equipment are capitalized.
These capitalized costs may include structural improvements, equipments and
fixtures. All ordinary repairs and maintenance costs are expensed as
incurred.
Depreciation
is calculated using the straight-line method over the estimated useful lives of
the assets:
|
Building
|
20
years
|
|
Machinery
and Equipment
|
10
years
|
|
Office
and Lab Equipment
|
5 -
10 years
|
|
Vehicles
|
5 -
10 years
|
Construction-in-progress
Construction-in-progress
consists of amounts expended for plant construction. Construction-in-progress is
not depreciated until such time as the assets are completed and put into
service. Once plant construction is completed, the cost accumulated in
construction-in-progress is transferred to property, plant, and
equipment.
Impairment of long-lived
assets
The
Company accounts for impairment of plant and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value.
Intangible
assets
The
Company’s intangible assets consist of a land use right at December 31, 2009.
According to the laws of China, the government owns all the land in China.
Companies or individuals are authorized to possess and use the land only through
land use rights granted by the Chinese government. Land use rights are being
amortized using the straight-line method over 50 years, the lease term of the
rights.
Comprehensive
income
The
Company has adopted ASC 220,
Reporting Comprehensive
Income, which establishes standards for reporting and displaying comprehensive
income, its components, and accumulated balances in a full-set of
general-purpose financial statements. The Company’s accumulated other
comprehensive income represents the accumulated balance of foreign currency
translation adjustments.
Revenue
recognition
The
Company recognizes revenue net of value added tax (VAT) when persuasive evidence
of an arrangement exists, delivery of the goods has occurred, customer
acceptance has been obtained, which means the significant risks and ownership
have been transferred to the customer, the price is fixed or determinable and
collectability is reasonably assured. No return allowance is made as products
returns are insignificant based on historical experience. Costs of distributing
products to the Company’s customers are included in selling
expenses.
Cost of goods
sold
Cost of
goods sold consists primarily of raw materials, utility and supply costs
consumed in the manufacturing process, manufacturing labor, depreciation expense
and direct overhead expenses necessary to manufacture finished goods as well as
warehousing and distribution costs such as inbound freight charges, shipping and
handling costs, purchasing and receiving costs.
Research and development
costs
Research
and development costs are expensed as incurred. Research and development
expenses were $618,814, $357,097, $556,071 and $223,057 for the nine months
ended September 30, 2010 and 2009, the years ended December 31, 2009 and 2008,
respectively.
Income
taxes
The
Company accounts for income and deferred tax under the provision of ASC 740
“Income Taxes”. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. ASC 740 also requires the recognition of the future
tax benefits of net operating loss carry forwards. A valuation allowance is
established when the deferred tax assets are not expected to be realized within
a reasonable period of time.
Value added
tax
The
Company is subject to value added tax (“VAT”). The applicable VAT rate is
different based on the different structure of business under PRC tax law. Some
of the Company’s transactions are levied at a VAT tax rate of 17% for products
sold in the PRC. The amount of VAT liability is determined by
applying the applicable tax rate to the invoiced amount of goods sold (output
VAT) less VAT paid on purchases made with the relevant supporting invoices
(input VAT). Starting January 1, 2010, according to the PRC tax regulation, the
Company is entitled to receive VAT refund from the PRC government for a period
of two years as the government granted the Company the status of Comprehensive
Utilization of Resources Company.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company subsidiaries are local currencies, primarily the PRC currency
Yuan (Renminbi) and Hong Kong dollar. Transactions denominated in foreign
currencies are translated into U.S. dollar at exchange rate in effect on the
date of the transactions. The financial statements are translated into U.S.
dollars using period-end rates of exchange for assets and liabilities and
average rates of exchange for the period for revenues and expenses. Exchange
gains or losses on transaction are included in earnings.
Earnings
per share
Basic
earnings per share is computed by dividing net income by weighted average number
of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
diluting securities outstanding during each period. At September 30,
2010 and December 31, 2009 and 2008, respectively, the Company had no common
stock equivalents that could potentially dilute future earnings per
share.
Related
parties
A party
is considered to be related to the Company if the party directly or indirectly
or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners
of the Company, its management, members of the immediate families of principal
owners of the Company and its management and other parties with which the
Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests. A party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership interest in one of
the transacting parties and can significantly influence the other to an extent
that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests is also a related party.
Recently issued accounting
pronouncements
In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB Accounting Standards Codification
(ASC) and amended the
hierarchy of generally accepted accounting principles (ASC) and amended the
hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did
not change current U.S. GAAP, but was intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. All previously existing accounting standard
documents were superseded and all other accounting literature not included in
the ASC is considered non-authoritative. New accounting standards issued
subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The Company adopted the ASC on July 1, 2009. This
standard did not have an impact on the Company’s consolidated results of
operations or financial condition.
In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
consolidated results of operations or financial condition.
In May
2009, the FASB issued new guidance on the treatment of subsequent events
which is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
Specifically, this new guidance sets forth the period after the balance sheet
date during which management of a reporting entity should evaluate events
or transactions that occurred for potential recognition or disclosure in
the financial statements, the circumstances under which an entity
should recognize events or transactions that occurred after the balance
sheet date in its financial statements, and the disclosures that an entity
should make about events or transactions that occurred after the balance
sheet date. This new guidance was effective for fiscal years and interim periods
ended after June 15, 2009 and must be applied prospectively. We adopted and
applied the provisions of the new guidance in the third quarter of
2009.
In
February 2010, subsequent to our adoption of the new guidance discussed above,
the FASB issued updated guidance on subsequent events, amending the May
2009 guidance. This updated guidance revised various terms and definitions
within the guidance and requires us, as an "SEC filer," to evaluate
subsequent events through the date the financial statements are issued, rather
than through the date the financial statements are available to be issued.
Furthermore, we no longer are required to disclose the date through which
subsequent events have been evaluated. The updated guidance was effective
for us immediately upon issuance. As such, we adopted and applied the provisions
of the updated guidance in the first quarter of 2010. Our adoption of
both the new and updated guidance did not have an impact on our consolidated
financial position or results of operations.
In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
adoption did not have a material impact on the Company’s consolidated results of
operations or financial condition.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at
Fair Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. The ASU is effective
October 1, 2009. The adoption of this standard did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under ASC 820
by adding required disclosures about items transferring into and out of levels 1
and 2 in the fair value hierarchy; adding separate disclosures about purchase,
sales, issuances, and settlements relative to level 3 measurements; and
clarifying, among other things, the existing fair value disclosures about the
level of disaggregation. This ASU is effective for the first quarter of 2010,
except for the requirement to provide level 3 activities of purchases, sales,
issuances, and settlements on a gross basis, which is effective beginning the
first quarter of 2011. Since this standard impacts disclosure requirements only,
its adoption did not have a material impact on the Company’s consolidated
results of operations or financial condition.
NOTE
3 - ACCOUNTS RECEIVABLE
Accounts
receivable consists of the following:
|
|
|
September 30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
2,615,245
|
|
|
$
|
1,626,414
|
|
|
$
|
1,181,654
|
|
|
Allowance
for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Accounts
receivable, net
|
|
$
|
2,615,245
|
|
|
$
|
1,626,414
|
|
|
$
|
1,181,654
|
|
NOTE
4 – INVENTORIES
|
|
|
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
230,469
|
|
|
$
|
36,708
|
|
|
$
|
154,627
|
|
|
Finished
goods
|
|
|
664,595
|
|
|
|
684,334
|
|
|
|
243,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Inventories
|
|
$
|
895,064
|
|
|
$
|
721,042
|
|
|
$
|
398,040
|
|
NOTE
5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consist of the following:
|
|
|
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Prepaid
research expenses
|
|
$
|
121,033
|
|
|
$
|
203,654
|
|
|
$
|
131,186
|
|
|
Advance
to suppliers
|
|
|
1,113,120
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
current assets
|
|
|
10,171
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
1,244,324
|
|
|
$
|
203,654
|
|
|
$
|
131,186
|
|
NOTE
6 - PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following:
|
|
|
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
1,573,209
|
|
|
$
|
1,376,319
|
|
|
$
|
1,370,084
|
|
|
Machinery
and equipment
|
|
|
2,309,785
|
|
|
|
2,189,827
|
|
|
|
2,183,451
|
|
|
Office
and lab equipment
|
|
|
92,331
|
|
|
|
20,669
|
|
|
|
5,031
|
|
|
Vehicles
|
|
|
56,737
|
|
|
|
5,868
|
|
|
|
5,868
|
|
|
Total
at cost
|
|
|
4,032,062
|
|
|
|
3,592,683
|
|
|
|
3,564,434
|
|
|
Less:
accumulated depreciation
|
|
|
892,613
|
|
|
|
658,780
|
|
|
|
384,088
|
|
|
Total
property and equipment, net
|
|
$
|
3,139,449
|
|
|
$
|
2,933,903
|
|
|
$
|
3,180,346
|
|
Depreciation
expense for the year ended December 31, 2009 and 2008 are $274,523 and $269,805,
respectively.
Depreciation
expense for the nine months ended September 30, 2010 and 2009 was $216,533 and
$205,779, respectively.
NOTE
7 - PREPAYMENT ON LAND USE RIGHTS AND FORESTS
In
November 2009, the Company entered into an agreement with a related party to
purchase 165 acres of Sapindus forests and the forest land use rights for RMB
20,000,000 (approximately $2.9 million). As of September 30, 2010 and December
31, 2009, the Company had paid $2,323,494 and $1,220,690, respectively, towards
the total purchase price. The forests ownership and land use rights certificate
is subject to the Zhejiang Provenience Forestry Administration’s approval after
the completion of certain administrative processes.
NOTE
8 - INTANGIBLE ASSETS
Intangible
assets consist of the following land use right as of September 30, 2010,
December 31, 2009 and 2008:
|
|
|
September 30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Cost
of land use rights
|
|
$
|
195,957
|
|
|
$
|
192,030
|
|
|
$
|
192,030
|
|
|
Less:
accumulated amortization
|
|
|
14,681
|
|
|
|
11,506
|
|
|
|
7,666
|
|
|
Land
use rights, net
|
|
$
|
181,276
|
|
|
$
|
180,524
|
|
|
$
|
184,364
|
|
Amortization
expense for the nine months ended September 30, 2010 and 2009 was $2,888 and
$2,878, respectively. Amortization expense for the year ended December 31, 2009
and 2008 was $3,838 and $3,774, respectively.
Amortization
expense for the next five years and thereafter is as follows:
|
2010
(for the remaining three months)
|
|
$
|
963
|
|
|
2011
|
|
|
3,851
|
|
|
2012
|
|
|
3,851
|
|
|
2013
|
|
|
3,851
|
|
|
2014
|
|
|
3,851
|
|
|
2015
|
|
|
3,851
|
|
|
Thereafter
|
|
|
161,058
|
|
|
Total
|
|
$
|
181,276
|
|
NOTE
9 -
SHORT
TERM NOTES PAYABLE
In July
2010, the Company obtained a one year credit line from a bank. Total available
credit is RMB 20,000,000 (approximately $2.9 million). As of September 30, 2010,
total borrowing on the line is $449,100 (RMB 3,000,000) for a period of one year
from July 2010 through July 2011. The loan bears an interest rate at 6.372% per
annum and the use of proceeds from the loan is restricted for purchase of waste
oil. The line of credit is guaranteed by Jianhu Qinglong Lumber Development Ltd.
Co., a Company owned by one of the shareholders, during the term of the loan and
two years after the loan’s expiration date. Deposits required by the bank for
outstanding borrowings were $40,431 at September 30, 2010.
NOTE
10 - RELATED PARTY TRANSACTIONS
Due to
related party consists of the following:
|
|
|
September 30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Due
to Huang, Sanfu, Shareholder
|
|
$
|
513,930
|
|
|
$
|
234,720
|
|
|
$
|
-
|
|
|
Due
to Nie, Xinfeng, Shareholder
|
|
|
561,820
|
|
|
|
2,411,895
|
|
|
|
2,331,210
|
|
|
Due
to Lou, Yuanmin, Former Shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
545,716
|
|
|
Due
to Guo, Tianzhi, Former Shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
154,035
|
|
|
|
|
$
|
1,075,750
|
|
|
$
|
2,646,615
|
|
|
$
|
3,030,961
|
|
Borrowings
from the shareholders were non-interest bearing, unsecured and have no set
repayment date.
In
November 2009, the Company purchased a piece of forest from a company controlled
by Huang, Sanfu. (Note 7)
During
the nine months ended September 30, 2010, the Company paid $436,152 R&D fees
to a company controlled by Huang, Sanfu pursuant to a research and development
contract.
During
the period prior to October 1, 2010, the Company used the vehicles owned by the
shareholders of the Company for free.
NOTE
11 - SHAREHOLDERS’ EQUITY
As
stipulated by the relevant laws and regulations for enterprises operating in the
PRC, the subsidiaries of the Company are required to make annual appropriations
to a statutory surplus reserve fund. Specifically, the subsidiaries of the
Company are required to allocate 10% of their profits after taxes, as determined
in accordance with the PRC accounting standards applicable to the subsidiaries
of the Company, to a statutory surplus reserve until such reserve reaches 50% of
the registered capital of the subsidiaries of the Company as decided by the
board of directors. The Company has allocated $173,702, $205,659 and $99,909
statutory reserve fund for the nine months ended September 30, 2010, the year
ended December 31, 2009 and 2008, respectively.
NOTE
12 - INCOME TAXES
Companies
established in China are governed by the Income Tax Law of the PRC concerning
the private-run enterprises, which are generally subject to tax at a statutory
rate of 25% on income reported in the statutory financial statements after
appropriate tax adjustments beginning January 1, 2008. Ding Neng Zhangzhou,
which was considered production-oriented foreign-invested enterprise with
operation period of more than 10 years, was entitled to a tax holiday of a
two-year 100% exemption followed by a three-year 50% exemption from the first
profit making year after offsetting accumulated tax losses. Ding Neng
Zhangzhou’s tax holiday was started in 2008.
The tax
authority of the PRC government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax
authority may take different views about the Company’s tax filings which may
lead to additional tax liabilities.
The
provision for taxes on earnings consisted of:
|
|
|
September 30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Current
income taxes expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
Enterprises Income Taxes:
|
|
$
|
885,011
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
United
States Federal Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
885,011
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A
reconciliation between the income tax computed at the U.S. statutory rate and
the Group's provision for income tax is as follows:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
U.S.
statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
|
Foreign
income not recognized in the U.S.
|
|
|
-34
|
%
|
|
|
-34
|
%
|
|
|
-34
|
%
|
|
|
-34
|
%
|
|
PRC
preferential enterprise income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
Effect
of tax exemption
|
|
|
-12.5
|
%
|
|
|
-25
|
%
|
|
|
-25
|
%
|
|
|
-25
|
%
|
|
Provision
for income tax
|
|
|
12.5
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Accounting for Uncertainty
in Income Taxes
The
Company accounts for uncertainty in income taxes in accordance with applicable
accounting standards, which prescribe a recognition threshold and measurement
process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. These accounting standards also
provide guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Based on
the Company’s evaluation, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions. In the event it receives an assessment for interest and/or
penalties, it will be classified in the financial statements as tax
expense.
NOTE
13 - OPERATING LEASE
The
Company has entered into multiple rental agreements for the lease of office and
storage premises and vehicles. The Company’s commitments for minimum lease
payments under these non-cancelable operating leases for the next five years are
as follows:
|
Year
Ended December 31,
|
|
|
|
|
2010
|
|
$
|
64,954
|
|
|
2011
|
|
|
87,606
|
|
|
2012
|
|
|
51,395
|
|
|
2013
|
|
|
51,395
|
|
|
2014
|
|
|
51,395
|
|
|
Thereafter
|
|
|
38,546
|
|
|
|
|
$
|
345,291
|
|
Rent
expense was $28,755 for the nine months ended September 30, 2010 and Nil for all
prior periods.
NOTE
14 - OPERATING RISK
Country
risk
The
Company has significant operating risk in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in have a material adverse effect upon the Company’s
business and financial condition.
Credit
risk
A
significant portion of the Company’s cash at September 30, 2010, December 31,
2009 and 2008 is maintained at various financial institutions in the PRC which
do not provide insurance for amounts on deposit. The Company has not
experienced any losses in such accounts and believes it is not exposed to
significant credit risk in this area.
Exchange
risk
The
Company cannot guarantee the Renminbi, and US dollar exchange rate will remain
steady. The exchange rate could fluctuate depending on changes in the political
and economic environments without notice.
Concentration
risk
For the
nine months ended September 30, 2010, five customers had net sales exceeding 10%
of the Company’s total sales for the period at 14%, 12%, 11%, 11% and 10%,
respectively. For the year ended December 31, 2009, five customers had net sales
exceeding 10% of the Company’s total sales for the year at 21%, 17%, 16%, 15%
and 11%, respectively. For year ended December 31, 2008, four customers had net
sales exceeding 10% of the Company’s total sales for the year at 19%, 17%, 16%
and 15%, respectively.
For the
nine months ended September 30, 2010, four suppliers had net transactions
exceeding 10% of the Company’s total purchases for the period at 14%, 13%, 13%
and 11%, respectively. For the year ended December 31, 2009, five suppliers had
net transactions exceeding 10% of the Company’s total purchases for the year at
21%, 19%, 11%, 10% and 10%, respectively. For year ended December 31, 2008, four
suppliers had net transactions exceeding 10% of the Company’s total purchases
for the year at 22%, 22%, 16% and 12%, respectively.
Lack of
Insurance
The
Company could be exposed to liabilities or other claims for which the Company
would have no insurance protection. The Company does not currently maintain any
business interruption insurance, products liability insurance, or any other
comprehensive insurance policy except for property insurance policies with
limited coverage. As a result, the Company may incur uninsured liabilities and
losses as a result of the conduct of its business. There can be no guarantee
that the Company will be able to obtain additional insurance coverage in the
future, and even if it can obtain additional coverage, the Company may not carry
sufficient insurance coverage to satisfy potential claims. Should uninsured
losses occur, any purchasers of the Company’s common stock could lose their
entire investment.
Land use rights
contingency
In
October 2006,
Mr.
Xinfeng Nie, chairman of the board, on behalf of Ding Neng Zhangzhou,
entered into an agreement with the local government to purchase the land
use rights (
Note 8
) for
approximately 56 Mu of land for use in the operations of Ding Neng Zhangzhou.
The land use right certificate is subject to the Fujian Provenience Land and
Resource Administration’s approval after the completion of certain
administrative processes.
NOTE 15 -
SUBSEQUENT EVENTS
On
November 12,
2010
, the Company entered into
a Share Exchange Agreement (the “Share Exchange Agreement”) with China
INSOnline, Corp. (“CHIO”), a Delaware corporation, and the shareholders of Ding
Neng Holdings Limited (“Ding Neng BVI Shareholders”). Pursuant to the
Share Exchange Agreement, CHIO agreed to issue shares of its Common Stock
representing
90
% of the Common Stock issued
and outstanding immediately following the closing of the Share Exchange to Ding
Neng BVI Shareholders in exchange for 100% of the share capital of Ding Neng BVI
(the "Share Exchange"). The transaction was accounted for as a reverse merger
and recapitalization whereby the Company is the accounting acquirer. Prior to
the closing of the Share Exchange, CHIO’s Common Stock shall be subject to a
reverse split on a basis between 1:20 and 1:40 as determined by the CHIO Board
of Directors. Upon closing, approximately
4
% of CHIO Common Stock will be held by the
former shareholders of CHIO,
90
% of the
shares will be held by the equity owners of the Company, and 4.5% of the shares
will be issued to an investment banker in connection with services provided to
complete the Share Exchange. The Company will become a wholly owned
subsidiary of China INSOnline, Corp. upon the closing of the Share
Exchange.
*
* The numbers set forth in the
foregoing paragraph are presented on the basis of an amendment to the Share
Exchange Agreement, dated as of December 6, 2010.
Pro
Forma Financial Statements
DING
NENG HOLDINGS, LTD.
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,
2010
|
|
|
|
DING
NENG
|
|
|
|
CHINA
|
|
|
|
PRO-FORMA
|
|
|
|
|
|
|
|
|
PRO-FORMA
|
|
|
|
|
|
LTD.
|
|
|
|
CORP.
|
|
|
|
SPIN-OFF
|
|
|
|
RECAPITALIZATION
|
|
|
|
|
SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
2 (a)
|
|
|
|
Note
2 (b)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,683,673
|
|
|
$
|
115,711
|
|
|
$
|
(115,711
|
)
|
|
$
|
-
|
|
|
|
$
|
2,683,673
|
|
|
Accounts
receivable, net
|
|
|
2,615,245
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2,615,245
|
|
|
Inventories
|
|
|
895,064
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
895,064
|
|
|
Prepaid
expenses and other current assets
|
|
|
1,244,324
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,244,324
|
|
|
Tax
recoverable
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
Current
assets of discontinued operation
|
|
|
-
|
|
|
|
2,020
|
|
|
|
(2,020
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
7,438,306
|
|
|
|
117,731
|
|
|
|
(117,731
|
)
|
|
|
-
|
|
|
|
|
7,438,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
40,431
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
40,431
|
|
|
Property
and equipment, net
|
|
|
3,139,449
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
3,139,449
|
|
|
Construction
in progress
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Intangible
assets, net
|
|
|
181,276
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
181,276
|
|
|
Prepayment
on land use rights and forest
|
|
|
2,323,494
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2,323,494
|
|
|
Non-current
assets of discontinued operations
|
|
|
-
|
|
|
|
29,529
|
|
|
|
(29,529
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
13,122,956
|
|
|
$
|
147,260
|
|
|
$
|
(147,260
|
)
|
|
$
|
-
|
|
|
|
$
|
13,122,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable - trade
|
|
$
|
519,801
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
519,801
|
|
|
Accrued
liabilities
|
|
|
10,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
10,832
|
|
|
Taxes
payable
|
|
|
617,218
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
617,218
|
|
|
Short-term
notes payable
|
|
|
449,100
|
|
|
|
100,500
|
|
|
|
(100,500
|
)
|
|
|
-
|
|
|
|
|
449,100
|
|
|
Due
to related parties
|
|
|
1,075,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,075,750
|
|
|
Current
liabilities of discontinued operations
|
|
|
-
|
|
|
|
1,043,018
|
|
|
|
(1,043,018
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,672,701
|
|
|
|
1,143,518
|
|
|
|
(1,143,518
|
)
|
|
|
-
|
|
|
|
|
2,672,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
series A preferred stock, 1,000,000 authorized,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Common
stock
|
|
|
5,000
|
|
|
|
46,000
|
|
|
|
-
|
|
|
|
(22,250
|
)
|
2(c)
|
|
|
28,750
|
|
|
Additional
paid-in capital
|
|
|
953,539
|
|
|
|
2,060,535
|
|
|
|
-
|
|
|
|
(2,084,285
|
)
|
|
|
|
929,789
|
|
|
Accumulated
other comprehensive income
|
|
|
240,954
|
|
|
|
632,317
|
|
|
|
-
|
|
|
|
(632,317
|
)
|
|
|
|
240,954
|
|
|
Statutory
reserve
|
|
|
479,270
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
479,270
|
|
|
Retained
earnings
|
|
|
8,771,492
|
|
|
|
(3,735,110
|
)
|
|
|
996,258
|
|
|
|
2,738,852
|
|
|
|
|
8,771,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
10,450,255
|
|
|
|
(996,258
|
)
|
|
|
996,258
|
|
|
|
-
|
|
|
|
|
10,450,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
13,122,956
|
|
|
$
|
147,260
|
|
|
$
|
(147,260
|
)
|
|
$
|
-
|
|
|
|
$
|
13,122,956
|
|
The accompanying notes are an
integral part of these financial statements.
DING
NENG HOLDINGS, LTD.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010
|
|
|
LTD.
|
|
|
CORP.
|
|
|
|
|
|
OPERATIONS
|
|
|
|
|
|
|
|
|
Note
2 (d)
|
|
|
Note
2 (a)
|
|
|
|
|
|
|
Revenue
|
|
$
|
24,443,807
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,443,807
|
|
|
|
Cost
of revenue
|
|
|
16,326,079
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,326,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,117,728
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,117,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
683,442
|
|
|
|
-
|
|
|
|
-
|
|
|
|
683,442
|
|
|
|
Research
and development expenses
|
|
|
618,814
|
|
|
|
-
|
|
|
|
-
|
|
|
|
618,814
|
|
|
|
Depreciation
and amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations
|
|
|
6,815,472
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,815,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
6,569
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,569
|
|
|
|
Interest
expense
|
|
|
(4,375
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,375
|
)
|
|
|
Other
expenses
|
|
|
262,424
|
|
|
|
-
|
|
|
|
-
|
|
|
|
262,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
7,080,090
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,080,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
885,011
|
|
|
|
-
|
|
|
|
-
|
|
|
|
885,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations
|
|
$
|
6,195,079
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,195,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
$
|
-
|
|
|
|
(27,331,336
|
)
|
|
|
27,331,336
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
6,195,079
|
|
|
|
(27,331,336
|
)
|
|
|
27,331,336
|
|
|
|
6,195,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
192,578
|
|
|
|
(96,782
|
)
|
|
|
96,782
|
|
|
|
192,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
6,387,657
|
|
|
$
|
(27,428,118
|
)
|
|
$
|
27,428,118
|
|
|
$
|
6,387,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share – basic
|
|
$
|
124
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
50,000
|
|
|
|
46,000,000
|
|
|
|
|
|
|
|
28,750,000
|
|
2(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share – diluted
|
|
$
|
124
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – diluted
|
|
|
50,000
|
|
|
|
44,793,478
|
|
|
|
|
|
|
|
28,750,000
|
|
2(c)
|
The accompanying notes are an
integral part of these financial statements.
DING
NENG HOLDINGS, LTD.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR
THE YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
PRO-FORMA
|
|
|
|
|
DING
NENG
|
|
|
CHINA
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
HOLDINGS,
|
|
|
INSONLINE
|
|
|
PRO-FORMA
|
|
|
STATEMENT
OF
|
|
|
|
|
LTD.
|
|
|
CORP.
|
|
|
ADJUSTMENTS
|
|
|
OPERATIONS
|
|
|
|
|
|
|
|
Note
2 (e)
|
|
|
Note
2 (a)
|
|
|
|
|
|
Net
sales
|
|
$
|
15,289,379
|
|
|
$
|
17,726,420
|
|
|
$
|
(17,726,420
|
)
|
|
$
|
15,289,379
|
|
|
Cost
of sales
|
|
|
12,298,954
|
|
|
|
2,575,163
|
|
|
|
(2,575,163
|
)
|
|
|
12,298,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,990,425
|
|
|
|
15,151,257
|
|
|
|
(15,151,257
|
)
|
|
|
2,990,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
435,820
|
|
|
|
1,357,874
|
|
|
|
(1,357,874
|
)
|
|
|
435,820
|
|
|
Research
and development expenses
|
|
|
556,071
|
|
|
|
-
|
|
|
|
-
|
|
|
|
556,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations
|
|
|
1,998,534
|
|
|
|
13,793,383
|
|
|
|
(13,793,383
|
)
|
|
|
1,998,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,723
|
|
|
|
1,949
|
|
|
|
(1,949
|
)
|
|
|
2,723
|
|
|
Other
income
|
|
|
55,336
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,336
|
|
|
Loss
on sale of fixed assets
|
|
|
-
|
|
|
|
(5,306
|
)
|
|
|
5,306
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,056,593
|
|
|
|
13,790,026
|
|
|
|
(13,790,026
|
)
|
|
|
2,056,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
|
3,552,679
|
|
|
|
(3,552,679
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,056,593
|
|
|
$
|
10,237,347
|
|
|
$
|
(10,237,347
|
)
|
|
$
|
2,056,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
1,265
|
|
|
|
(58,583
|
)
|
|
|
58,583
|
|
|
|
1,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
2,057,858
|
|
|
$
|
10,178,764
|
|
|
$
|
(10,178,764
|
)
|
|
$
|
2,057,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share – basic and diluted
|
|
$
|
41.13
|
|
|
$
|
0.26
|
|
|
|
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic and diluted
|
|
|
50,000
|
|
|
|
40,000,000
|
|
|
|
|
|
|
|
28,750,000
|
2
(c)
|
The accompanying notes are an
integral part of these financial statements.
NOTES TO
THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 –
BASIS OF PRESENTATION
On
November 12,
2010 and December 6,
2010,
Ding Neng Holdings Ltd. (the “Company”), entered into a reverse acquisition
transaction through a share exchange with China INSOnline Corp. (“CHIO”),
whereby CHIO acquired 100% of the issued and outstanding capital stock of the
Company in exchange for 90 % of the Common Stock of CHIO issued and outstanding
immediately following the closing of the Share Exchange . Prior to the closing
of the Share Exchange, CHIO’s Common Stock shall be subject to a reverse split
of 1:40. Upon the close of the reverse acquisition, the Company will become
CHIO’s wholly-owned subsidiary and the former shareholders of the Company will
become the controlling stockholders of CHIO. The share exchange
transaction with CHIO is treated as a reverse acquisition, with the Company as
the accounting acquirer and CHIO as the acquired party.
CHIO had
begun winding down its operations during the quarter ended June 30,
2010.
Consequently, the assets and liabilities and the historical
operations that will be reflected in the consolidated financial statements for
periods prior to the Share Exchange Agreement will be those of the Company and
will be recorded at the historical cost basis. After the completion
of the Share Exchange Agreement, the Company’s consolidated financial statements
will include the assets and liabilities of the Company and CHIO, the historical
operations of the Company and the operations of CHIO from the closing date of
the Share Exchange Agreement.
These pro
forma consolidated financial statements are prepared assuming the above
transaction occurred on September 30, 2010 (as to the balance sheet) and on
January 1, 2009 and 2010, respectively (as to the income
statements).
Audited
financial statements of the Company and CHIO have been used in the preparation
of these pro forma consolidated financial statements. These pro forma
consolidated financial statements should be read in conjunction with the
historical financial statements of CHIO and the Company.
Note 2 –
PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
|
(a)
|
To
eliminate the equity of the accounting acquiree, CHIO, and to reflect the
recapitalization of the common stock and additional paid in capital of the
Company as a result of the reverse
merger.
|
|
(b)
|
To
reflect the assumed 1:
40
reverse
stock split and the issuance of
90
%
of Common Stock of CHIO issued and outstanding immediately following the
closing of the Share
Exchange.
|
|
(c)
|
The
historical income statement for the nine months ended June 30, 2010 for
China INSOnline is derived from the following historical income
statements: Income statements for the twelve months ended June 30, 2010
minus income statements for the six months ended December 31, 2009 and
plus income statements for the three months ended September 30,
2010.
|
|
(d)
|
The
historical income statement for the twelve months ended December 31, 2009
for China INSOnline is derived from the following historical income
statements: Income statements for the twelve months ended June 30, 2009
plus income statements for the six months ended December 31, 2009 and
minus income statements for the six months ended December 31,
2008.
|
ANNEX
A
SHARE
EXCHANGE AGREEMENT
This
SHARE EXCHANGE AGREEMENT
(this “
Agreement
”) is
entered into as of this 12th day of November, 2010, by and among China INSOnline
Corp., a Delaware corporation (hereinafter referred to as “
CIC
”), Ding Neng Holdings
Limited, a British Virgin Islands business company (“
Ding Neng”
) and the
shareholders of Ding Neng listed on
Schedule A
hereto
(collectively, the “
Ding Neng
Shareholders
”).
WHEREAS
, CIC is a publicly
reporting company organized under the laws of Delaware with no significant
operations;
WHEREAS
, the Ding Neng
Shareholders collectively own 100% of the issued and outstanding capital stock
of Ding Neng;
WHEREAS
, Ding Neng owns 100%
of the issued and outstanding capital stock of Ding Neng Bio-technology Co.,
Limited, a Hong Kong company (“
DBT
”), which owns 100% of the
issued and outstanding capital stock of Zhangzhou Fuhua Biomass Energy
Technology Co., Ltd. (the “
WOFE
”), a wholly foreign owned
enterprise incorporated under the laws of the People’s Republic of China (the
“
PRC
”);
WHEREAS
, on October 28, 2010,
the WOFE entered into a series of contractual agreements with Fujian Zhangzhou
Dingneng Bio-Technology Co., Ltd. (“
Ding Neng Bio-Tech
”), a
company incorporated under the laws of the PRC, and its shareholders, in which
the WOFE effectively assumed management of the business activities of Ding Neng
Bio-Tech and has the right to appoint all executives and senior management and
the members of the board of directors of Ding Neng Bio-Tech (Ding Neng, DBT,
WOFE and Ding Neng Bio-Tech shall be referred to herein collectively as the
“
Group
”);
WHEREAS
, CIC proposes to
acquire 100% of the issued and outstanding equity securities of Ding Neng (the
“
Ding Neng Shares
”) from
the Ding Neng Shareholders in exchange (the “
Exchange
”) for the issuance by
CIC to the Ding Neng Shareholders of a number of newly issued shares (the
“Exchange Shares”
) of
CIC
’
s common stock, par value $0.001 per
share (the “
Common
Stock
”
)
representing an aggregate
of 85% (subject to adjustment as set forth herein) of the issued and outstanding
shares of Common Stock immediately following the Closing
,
and the Ding Neng Shareholders
desire to exchange their respective Ding Neng Shares for the Exchange Shares on
the terms described herein; and
WHEREAS,
prior to the closing
of the Exchange (the
“Closing
”), (1) the Common
Stock shall be subject to a reverse split on a basis between 1:20 and 1:40, to
be determined by the CIC Board of Directors within five business days of the
date of the Closing (the “
Reverse Split
”), to facilitate
the compliance of CIC following the Closing Date with the initial listing
requirements of the NASDAQ Capital Market and (2) CIC shall obtain all necessary
approvals and consents required to change its name to China Bio-Energy Corp.
effective as of the Closing (the
“Name Change”
);
and
WHEREAS
, on the date of the
closing (the
“Closing
Date”
), and as a result of the transactions contemplated hereby, Ding
Neng will become a wholly-owned subsidiary of CIC.
NOW THEREFORE
, on the basis of
the foregoing stated premises and for and in consideration of the mutual
covenants and agreements hereinafter set forth and the mutual benefits to the
parties to be derived here from, and intending to be legally bound hereby, it is
hereby agreed as follows:
ARTICLE
I
REPRESENTATIONS,
COVENANTS, AND WARRANTIES OF DING NENG
As an
inducement to, and to obtain the reliance of CIC, except as set forth in the
Schedules of Ding Neng attached hereto (the “
Ding Neng Schedules
”), Ding
Neng, DBT, WOFE and Ding Neng Bio-Tech hereby each represent and warrant, solely
on behalf of itself, to CIC as of the date hereof and as of the Closing
Date. All references to the Group or each of Ding Neng, DBT, WOFE or
Ding Neng Bio-Tech in this Article I shall be deemed to also refer to its
respective subsidiaries and affiliates. As used herein, the term
“
knowledge of the Group
”
or similar language refers to the actual knowledge of the executive officers and
directors of Ding Neng Bio-Tech.
Section
1.01
Organization
. Each
member of the Group is organized under the laws of the jurisdiction set forth in
Schedule 1.01
of the Ding Neng Schedules, is duly formed or organized, validly existing and in
good standing under the laws of its jurisdiction of organization and has the
requisite power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being or currently planned
by each member of the Group to be conducted. Each member of the Group
is in possession of all governmental or third party approvals necessary to own,
lease and operate the properties it purports to own, operate or lease, to carry
on its respective business as it is now being conducted and to consummate the
transactions contemplated by this Agreement. No member of the Group
is in violation of any of the provisions of their respective charter or
organization documents. The ownership records (which have been
delivered to CIC) of each Group member’s registered capital are true, complete
and accurate records of such ownership as of the date of such records and
contain all transfers of such registered capital since the time of their
respective organization. No member of the Group is required to
qualify to do business as a foreign corporation in any other jurisdiction,
except where the failure to so qualify would not have a Material Adverse Effect
on Ding Neng. As used herein,
“Material Adverse Effect”
shall mean any material, adverse effect on: (i) the assets, liabilities, results
of operations, condition (financial or otherwise) or business of the entity or
individual to which such statement applies, taken as a whole; or (ii) the
ability of such entity or individual to perform its obligations hereunder, but,
to the extent applicable, shall exclude any circumstance, change or effect to
the extent resulting or arising from: (A) any change in general economic
conditions in the industries or markets in which such entity or individual
operates so long as such entity or individual is not disproportionately (in a
material manner) affected by such changes; (B) national or international
political conditions, including any engagement in hostilities, whether or not
pursuant to the declaration of a national emergency or war, or the occurrence of
any military or terrorist attack so long as such entity or individual is not
disproportionately (in a material manner) affected by such changes; (C) changes
in United States generally accepted accounting principles, or the interpretation
thereof; or (D) the entry into or announcement of this Agreement, actions
contemplated by this Agreement, or the consummation of the transactions
contemplated hereby.
Section
1.02
Capitalization
.
(a) The
number of shares which Ding Neng is authorized to issue consists of 50,000
shares, par value US$0.10 per share. There are 50,000 shares of Ding
Neng currently issued and outstanding. The issued and outstanding
shares of Ding Neng are legally issued, fully paid, and non-assessable and not
issued in violation of the preemptive or other rights of any
person. All of the issued and outstanding shares of Ding Neng are
held legally and beneficially by the Ding Neng Shareholders. As of
the Closing Date, no shares of Ding Neng will be reserved for issuance upon the
exercise of outstanding options, warrants or other equity-linked securities of
Ding Neng. All outstanding equity of Ding Neng has been issued and
granted in compliance with: (i) all applicable securities laws and other
applicable laws and regulations and (ii) all requirements set forth in any
material contracts, agreements, franchises, license agreements, debt instruments
or other commitments to which Ding Neng is a party or by which it or any of its
assets or properties are bound, all of which are set forth on
Schedule 1.09
to
the Ding Neng Disclosure Schedules (the “
Ding Neng Material
Contracts
”).
(b) There
are no equity securities or similar ownership interests of any class of any
equity security of Ding Neng, or any securities exchangeable or convertible into
or exercisable for such equity securities or similar ownership interests,
issued, reserved for issuance or outstanding. Except as contemplated
by this Agreement or as set forth on
Schedule 1.02
of the
Ding Neng Schedules, there are no subscriptions, options, warrants, equity
securities or similar ownership interests, calls, rights (including preemptive
rights), commitments or agreements of any character to which Ding Neng is a
party or by which it is bound obligating Ding Neng to issue, deliver or sell, or
cause to be issued, delivered or sold, or repurchase, redeem or otherwise
acquire, or cause the repurchase, redemption or acquisition of, any shares of
capital stock or similar ownership interests of Ding Neng or obligating Ding
Neng to grant, extend, accelerate the vesting of or enter into any such
subscription, option, warrant, equity security, call, right, commitment or
similar agreement.
(c) Except
as contemplated by this Agreement and except as set forth in
Schedule 1.02
of the
Ding Neng Schedules, there is no voting trust, proxy, rights plan, anti-takeover
plan or other agreement or understanding to which Ding Neng is a party or by
which it is bound with respect to any equity security of any class of Ding Neng,
and there are no material agreements to which Ding Neng is a party, or which
Ding Neng has knowledge of, which conflicts with this Agreement or the
transactions contemplated herein or otherwise prohibits the consummation of the
transactions contemplated hereunder.
Section
1.03
Subsidiaries
. Except
as set forth on
Schedule 1.03
of the
Ding Neng Schedules (which sets forth the corporate structure of the Group and
the jurisdiction of organization), Ding Neng does not have any subsidiaries, and
does not own, beneficially or of record, any shares of any other entity directly
or indirectly.
Section
1.04
Financial
Statements
.
(a)
On or
before the Closing Date, CIC shall have been furnished with: (i) the audited
balance sheets of Ding Neng Bio-Tech as of December 31, 2009 and December 31,
2008 and the related audited statements of operations, stockholders’ equity and
cash flows for the fiscal years ended December 31, 2009 and December 31, 2008
together with the notes to such statements and the opinion of Malone Bailey,
LLP, independent certified public accountants, and (ii) the unaudited financial
statements of Ding Neng Bio-Tech for the nine months ended September 30, 2010
(the “
Ding Neng Financial
Statements
”).
(b) Each
set of financial statements (including, in each case, any related notes thereto)
provided pursuant to
Section 1.04(a)
were
prepared in accordance with U.S. generally accepted accounting principles,
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto) and each fairly presents in all material
respects the financial position of Ding Neng at the respective dates thereof and
the results of its operations and cash flows for the periods indicated, except
that the unaudited interim financial statements were or are subject to normal
adjustments which were not or are not expected to have a Material Adverse
Effect.
(c)
As of the
date of all balance sheets included in each set of financial statements provided
pursuant to
Section
1.04(a)
, except as and to the extent reflected or reserved against
therein, Ding Neng Bio-Tech had no liabilities or obligations (absolute or
contingent) which should be reflected in the balance sheets or the notes thereto
prepared in accordance with U.S. generally accepted accounting principles, and
all assets reflected therein are properly reported and present fairly in all
material respects the value of the assets of Ding Neng Bio-Tech, in accordance
with U.S. generally accepted accounting principles. All statements of
operations, stockholders’ equity and cash flows included in the Ding Neng
Bio-Tech financial statements reflect fairly in all material respects the
information required to be set forth therein by U.S. generally accepted
accounting principles.
Section
1.05
Information
.
(a) The
information concerning the Group set forth in this Agreement and the Ding Neng
Schedules is complete and accurate in all material respects and does not contain
any untrue statement of a material fact or omit to state a material fact
required to make the statements made, in light of the circumstances under which
they were made, not misleading.
(b)
None of
the information supplied or to be supplied by the Group for inclusion in the
information statement, to be filed by CIC, with respect to the transactions
contemplated hereby (the
“Information Statement”
) will,
at the date it is first mailed to CIC’s stockholders, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. Solely
with respect to information provided by the Group for inclusion in the
Information Statement, such information will comply in all material respects
with the requirements of the Securities Exchange Act of 1934, as amended (the
“
Exchange Act
”), and the
rules and regulations thereunder, it being understood that no representation or
warranty is made by the Group with respect to overall form of the Information
Statement or statements made or incorporated by reference therein based solely
on information supplied by CIC in writing for inclusion or incorporation by
reference in the Information Statement. None of the information
supplied or to be supplied by the Group for inclusion in the Information
Statement shall, at the time such document is filed, at the time amended or
supplemented, or at the time the Information Statement is declared effective by
the Securities and Exchange Commission (the “
SEC
”), contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not
misleading.
Section
1.06
Options or
Warrants
. Except as set forth in
Schedule 1.06
of the
Ding Neng Schedules, there are no existing options, warrants, calls, or
commitments of any character relating to the authorized and unissued stock of
any member of the Group.
Section
1.07
Absence of Certain Changes
or Events
. Except as disclosed on
Schedule 1.07
of the
Ding Neng Schedules or the Ding Neng Financial Statements (with respect to
subsequent events), since June 30, 2010:
(a) There
has not been any material adverse change in the business, operations,
properties, assets, or condition (financial or otherwise) of the
Group;
(b) No
member of the Group has:
(i) amended
its memorandum of association or articles of association or other organizational
documents;
(ii) declared
or made, or agreed to declare or make, any payment of dividends or distributions
of any assets of any kind whatsoever to stockholders or purchased or redeemed,
or agreed to purchase or redeem, any of its shares;
(iii) made
any material change in its method of management, operation or
accounting,
(iv) entered
into any other material transaction other than in the ordinary course of its
business;
(v) made
any increase in or adoption of any profit sharing, bonus, deferred compensation,
insurance, pension, retirement, or other employee benefit plan, payment, or
arrangement made to, for, or with its officers, directors, or
employees;
(vi) granted
or agreed to grant any options, warrants or other rights for its stocks, bonds
or other corporate securities calling for the issuance thereof,
(vii) borrowed
or agreed to borrow any funds or incurred, or become subject to, any material
obligation or liability (absolute or contingent) except as disclosed herein and
except liabilities incurred in the ordinary course of business;
(viii) sold
or transferred, or agreed to sell or transfer, any of its assets, properties, or
rights or canceled, or agreed to cancel, any debts or claims (except as
contemplated hereby);
(ix) issued,
delivered, or agreed to issue or deliver any stock, bonds or other corporate
securities including debentures (whether authorized and unissued or held as
treasury stock) except in connection with this Agreement and the transactions
contemplated hereby;
(x) experienced
any damage, destruction or loss, whether or not covered by insurance, that would
have a Material Adverse Effect;
(xi) made
any satisfaction or discharge of any lien, claim, or encumbrance or payment of
any obligation, except in the ordinary course of business; or
(xii)
made any
arrangement or commitments by which Ding Neng, DBT, WOFE or Ding Neng Bio-Tech
to do any of the things described in this
Section
1.07
.
Section
1.08
Litigation and
Proceedings
. Except as disclosed on
Schedule 1.08
of the
Ding Neng Schedules, there are no actions, suits, proceedings, or investigations
pending or, to the knowledge of the Group, threatened by or against the Group or
affecting the Group or their respective properties, at law or in equity, before
any court or any government, any state or other political subdivision thereof,
or any other entity, authority or body exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
including any governmental or regulatory authority, agency, department, board,
commission, administration or instrumentality, any court, tribunal or arbitrator
or any self-regulatory organization, domestic or foreign (each, a “
Governmental Authority
”), or
before any arbitrator of any kind. No member of the Group has any
knowledge of any material default on its part with respect to any judgment,
order, injunction, decree, award, rule, or regulation of any court, arbitrator,
or Governmental Authority.
Section
1.09
Contracts
.
(a)
Schedule 1.09
contains any oral or written: (i) contract for the employment of any officer or
employee; (ii) profit sharing, bonus, deferred compensation, stock option,
severance pay, pension benefit or retirement plan, (iii) agreement, contract, or
indenture relating to the borrowing of money, (iv) guaranty of any obligation;
(vi) collective bargaining agreement; or (vii) agreement with any present or
former officer or director of members of the Group.
(b) The
Ding Neng Material Contracts are valid and enforceable by the applicable members
of the Group in all respects, except as may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the enforcement of
creditors’ rights generally and subject to the qualification that the
availability of equitable remedies are subject to the discretion of the court
before which any proceeding therefore may be brought.
(c) With
respect to each Ding Neng Material Contract: (i) such Ding Neng Material
Contract is in full force and effect; (ii) no member of the Group is in breach
or default in any material respect, and no event has occurred that with the
passage of time or giving of notice or both would constitute such a breach or
default by any member of the Group, or permit termination or acceleration by the
other party, under the Ding Neng Material Contract, except for violations or
defaults that would not, individually or in the aggregate, reasonably be
expected to result in a Material Adverse Effect; and (iii) to the Group’s
knowledge, no other party to the Ding Neng Material Contract is in breach or
default in any material respect, and no event has occurred that with the passage
of time or giving of notice or both would constitute such a breach or default by
such other party, or permit termination or acceleration by any member of the
Group, under any Ding Neng Material Contract.
Section
1.10
No Conflict With Other
Instruments
. The execution of this Agreement and the
consummation of the transactions contemplated by this Agreement will not (a)
result in the breach of any term or provision of, constitute a default under, or
terminate, accelerate or modify the terms of any Ding Neng Material Contract to
which a member of the Group is a party or to which any of their respective
assets, properties or operations are subject, or result in the creation of a
Lien (as defined in
Section 3.01
) upon
any of the properties or assets of any member of the Group (b) conflict with the
charter documents, or (c) conflict with any material judgment, order, decree or
Law (defined in
Section
1.11
).
Section
1.11
Compliance With Laws and
Regulations
. Each member of the Group is in compliance with
all foreign, federal, state or local orders, statutes, laws, rules, regulations,
ordinances, writs, injunctions, arbitration awards, directives, judgments,
decrees, principles of common law, constitution, treaty or any interpretation
thereof enacted, promulgated, issued, enforced or entered by any Governmental
Authority (each, a “
Law
”
and collectively, the “
Laws
”) applicable to it and
the conduct of their respective businesses as currently conducted. No
member of the Group is in conflict with, or in default or violation of, nor have
any of them received any notice of any conflict with, or default or violation
of, (A) any applicable Law by which such member of the Group or any their
respective property or assets is bound or affected, or (B) any Ding Neng
Material Contract to which such member of the Group is a party or by which such
member or any property, asset or right of any member is bound or affected,
except, in each case, for any such conflicts, defaults or violations that would
not reasonably be expected to be material to such member. There is no
pending or, to the knowledge of Ding Neng, threatened proceeding or
investigation to which any member of the Group is subject before any
Governmental Authority regarding whether such member has violated in any
material respect any applicable Laws. No member of the Group has
received notice of any material violation of, or noncompliance with, any Law
applicable to such member or directing such member to take any remedial action
with respect to such applicable Law or otherwise, and no material deficiencies
of any member of the Group have been asserted by any Governmental Authority with
respect to possible violations of any applicable Laws. Each member of
the Group has filed all material reports, statements, documents, registrations,
filings or submissions required to be filed with any regulatory or Governmental
Authority, and all such reports, registrations, filings and submissions are in
compliance (and complied at the relevant time) with applicable Law and no
material deficiencies have been asserted by any such Governmental Authority with
respect to any reports, statements, documents, registrations, filings or
submissions required to be filed with respect to any member of the Group with
any Governmental Authority that have not been remedied.
Section
1.12
Authority; Execution and
Delivery; Enforceability
. Ding Neng has all requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions described herein. The execution and delivery by Ding Neng of this
Agreement and the consummation by Ding Neng of the transactions described herein
have been duly authorized and approved by the Board of Directors of Ding Neng
and no other corporate proceedings on the part of Ding Neng are necessary to
authorize this Agreement and the transactions described herein. When
executed and delivered, this Agreement will be enforceable against Ding Neng in
accordance with its terms.
Section
1.13
Valid
Obligation
. This Agreement and all agreements and other
documents executed by Ding Neng in connection herewith constitute the valid and
binding obligation of Ding Neng, enforceable in accordance with its or their
terms, except as may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting the enforcement of creditors’ rights generally and
subject to the qualification that the availability of equitable remedies is
subject to the discretion of the court before which any proceeding therefore may
be brought.
Section
1.14
Transactions With Affiliates
and Employees
. Except as set forth in
Schedule 1.14
of the
Ding Neng Schedules, none of the officers or directors of the Group and, to the
knowledge of the Group, none of the employees of the Group is presently a party
to any transaction with any member of the Group (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Group, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or
partner.
ARTICLE
II
REPRESENTATIONS,
COVENANTS, AND WARRANTIES OF CIC
As an
inducement to, and to obtain the reliance of Ding Neng and the Ding Neng
Shareholders, except as set forth on the Schedules of CIC attached hereto (the
“
CIC Schedules
”), CIC,
for itself and its subsidiaries and affiliates, hereby makes the following
representations and warranties to Ding Neng and the Ding Neng Shareholders, as
of the date hereof and as of the Closing Date. All references to CIC
in this Article II shall be deemed to refer to CIC, its subsidiaries and its
affiliates. As used herein, the term “
knowledge of CIC
” or similar
language refers to the knowledge of Zhenyu Wang.
Section
2.01
Organization
. Except
as set forth in
Schedule 2.01
of the
CIC Schedules, CIC is a corporation duly organized, validly existing, and in
good standing under the laws of Delaware and has the corporate power and is duly
authorized under all applicable laws, regulations, ordinances, and orders of
public authorities to carry on its business in all material respects as it is
now being conducted. The execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated hereby will not,
violate any provision of CIC’s certificate of incorporation or
bylaws. CIC has taken all action required by law, rule, regulation
(including, without limitation, all requirements of NASDAQ and FINRA), its
certificate of incorporation, its bylaws, or otherwise to authorize the
execution and delivery of this Agreement and the transactions contemplated
hereby (including, without limitation, the Reverse Split and Name Change), and,
except as subject to the Law, CIC has full power, authority, and legal right and
has taken all action required by law, its certificate of incorporation, bylaws,
or otherwise to consummate the transactions herein contemplated.
Section
2.02
Capitalization
.
(a) CIC’s
authorized capitalization consists of 100,000,000 shares of Common Stock, of
which 46,000,000 shares are issued and outstanding. All issued and
outstanding shares of Common Stock are legally issued, fully paid, and
non-assessable and not issued in violation of the preemptive or other rights of
any person or entity. As of the Closing Date, no shares of Common
Stock will be reserved for issuance upon the exercise of outstanding options,
warrants or other equity-linked securities of CIC. All outstanding
Common Stock has been issued and granted in compliance with: (i) all applicable
securities laws and other applicable laws and regulations and (ii) all
requirements set forth in any material contracts, agreements, franchises,
license agreements, debt instruments or other commitments to which CIC is a
party or by which it or any of its assets or properties are bound, all of which
are set forth on
Schedule 2.08
to the
CIC Disclosure Schedules (the “
CIC
Material
Contracts
”).
(b) There
are no equity securities or similar ownership interests of any class of any
equity security of CIC, or any securities exchangeable or convertible into or
exercisable for such equity securities or similar ownership interests, issued,
reserved for issuance or outstanding. Except as contemplated by this
Agreement or as set forth on
Schedule 2.02
of the
CIC Schedules, there are no subscriptions, options, warrants, equity securities
or similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which CIC is a party or by which
it is bound obligating CIC to issue, deliver or sell, or cause to be issued,
delivered or sold, or repurchase, redeem or otherwise acquire, or cause the
repurchase, redemption or acquisition of, any shares of capital stock or similar
ownership interests of CIC or obligating CIC to grant, extend, accelerate the
vesting of or enter into any such subscription, option, warrant, equity
security, call, right, commitment or similar agreement.
(c) Except
as contemplated by this Agreement and except as set forth in
Schedule 2.02
of the
CIC Schedules and the CIC SEC Reports, there are no registration rights, and
there is no voting trust, proxy, rights plan, anti-takeover plan or other
agreement or understanding to which CIC is a party or by which it is bound with
respect to any equity security of any class of CIC, and there are no agreements
to which CIC is a party, or which CIC has knowledge of, which conflicts with
this Agreement or the transactions contemplated herein or otherwise prohibits
the consummation of the transactions contemplated hereunder.
Section
2.03
Subsidiaries and Predecessor
Corporations
. Except as set forth on
Schedule 2.03
of the
CIC Schedules and the CIC SEC Reports, CIC does not have any predecessor
corporation(s) or subsidiaries, and does not own, beneficially or of record, any
shares of any other entity.
Section
2.04
SEC Filings; Financial
Statements
.
(a) Except
as set forth on
Schedule 2.04(a)
of
the CIC Schedules, CIC has filed all forms, reports, schedules, statements and
other documents required to be filed or furnished to the SEC since December 31,
2008 under the requirements of the Securities Act of 1933, as amended (the
“
Securities Act
”), or
the Exchange Act, together with any amendments, restatements or supplements
thereto, and will file all such forms, reports, schedules, statements and other
documents required to be filed subsequent to the date of this Agreement up to
the Closing Date. Except as set forth on
Schedule 2.04(a)
of
the CIC Schedules, the reports, registration statements and definitive proxy
statements filed by CIC with the SEC since December 18, 2007 (the “
CIC SEC Reports
”): (i) were
prepared in all material respects in accordance with the requirements of the
Securities Act and the Exchange Act, as the case may be, and the rules and
regulations thereunder and (ii) did not at the time they were filed with the SEC
(except to the extent that information contained in any CIC SEC Report has been
revised or superseded by a later filed CIC SEC Report) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not
misleading. All certifications and statements of CIC required by (i)
Rules 13a-14 or 15d-14 under the Exchange Act, or (ii) 18 U.S.C. §1350 (Section
906) of the Sarbanes-Oxley Act of 2002 (the “
Sarbanes-Oxley Act
”) with
respect to any CIC SEC Report (collectively, the “
Certifications
”) are each true
and correct. Except as disclosed in CIC’s Form 10-Ks for the years
ended June 30, 2009 and 2010, CIC maintains disclosure controls and procedures
required by Rules 13a-15(e) or 15d-15(e) under the Exchange Act; such controls
and procedures are not effective to ensure that all material information
concerning CIC is made known on a timely basis to the individuals responsible
for the preparation of CIC’s filings with the SEC and other public disclosure
documents. Except as disclosed in the CIC SEC Reports and
Schedule 2.04(a)
of
the CIC Schedules, each director and executive officer of CIC has filed with the
SEC on a timely basis all statements required by Section 16(a) of the Exchange
Act and the rules and regulations thereunder since December 31,
2008.
(b) CIC
has made available to the Ding Neng Shareholders a correct and complete copy, or
there has been available on the EDGAR system maintained by the SEC, copies of
each CIC SEC Report, which are all the forms, reports and documents filed by CIC
with the SEC since December 31, 2008. As of their respective dates,
the CIC SEC Reports: (i) complied in all material respects with the Securities
Act and the Exchange Act, as the case may be, and the rules and regulations of
the SEC thereunder applicable to such CIC SEC Reports, and (ii) did not at the
time they were filed (and if amended or superseded by a filing prior to the date
of this Agreement then on the date of such filing and as so amended or
superseded) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(c) Each
set of financial statements (including, in each case, any related notes thereto)
contained in the CIC SEC Reports comply as to form in all material respects with
the published rules and regulations of the SEC with respect thereto, were
prepared in accordance with U.S. generally accepted accounting principles,
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto or, in the case of unaudited statements, do not
contain footnotes as permitted by Form 10-Q promulgated under the Exchange Act)
and each fairly presents in all material respects the financial position of CIC
at the respective dates thereof and the results of its operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal adjustments which were not or are not
expected to have a Material Adverse Effect.
(d) As
of the date of all balance sheets included in the CIC SEC Reports, except as and
to the extent reflected or reserved against therein, CIC had no liabilities or
obligations (absolute or contingent) which should be reflected in the balance
sheets or the notes thereto prepared in accordance with U.S. generally accepted
accounting principles, and all assets reflected therein are properly reported
and present fairly in all material respects the value of the assets of CIC, in
accordance with U.S. generally accepted accounting principles. All
statements of operations, stockholders’ equity and cash flows included in the
CIC SEC Reports reflect fairly in all material respects the information required
to be set forth therein by U.S. generally accepted accounting
principles.
(e) Except
as disclosed with respect to internal control over financial reporting set forth
in CIC’s annual reports on Form 10-K for the fiscal years ended June 30, 2009
and 2010, since December 31, 2008, CIC has maintained a system of internal
accounting controls sufficient to provide reasonable assurance that: (i)
transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with U.S. generally accepted
accounting principles and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(f) Except
as set forth in
Schedule 2.04(f)
of
the CIC Schedules, CIC has no liabilities with respect to the payment of any
federal, state, county, local or other taxes (including any deficiencies,
interest or penalties), except for taxes accrued but not yet due and
payable.
(g) Except
as set forth in
Schedule 2.04(g)
of
the CIC Schedules, CIC has filed all state, federal or local income and/or
franchise tax returns required to be filed by it from December 31, 2008 to the
date hereof. Each of such income tax returns reflects the taxes due
for the period covered thereby, except for amounts which, in the aggregate, are
immaterial.
(h) Neither
CIC nor any manager, director, officer or employee of CIC has received any
complaint, allegation, assertion or claim, whether or not in writing, regarding
the accounting or auditing practices, procedures, methodologies or methods of
CIC or its internal accounting controls, including any complaint, allegation,
assertion or claim that CIC has engaged in questionable accounting or auditing
practices. No attorney representing CIC, whether or not employed by
CIC, has reported evidence of any violation of consumer protection or securities
laws, breach of fiduciary duty or similar violation by CIC or any of its
officers, directors, employees or agents to the Board of Directors of CIC or any
committee thereof or to any director or executive officer of CIC.
(i) The
books and records, financial and otherwise, of CIC are, in all material aspects,
complete and correct and have been maintained in accordance with good business
and accounting practices.
Section
2.05
Information
.
(a) The
information concerning CIC set forth in this Agreement, the CIC Schedules and
the CIC SEC Reports is complete and accurate in all material respects and does
not contain any untrue statements of a material fact or omit to state a material
fact required to make the statements made, in light of the circumstances under
which they were made, not misleading. In addition, CIC has fully
disclosed in writing to Ding Neng and the Ding Neng Shareholders (through this
Agreement, the CIC Schedules or the CIC SEC Reports) all information relating to
matters involving CIC or its assets or its present or past operations or
activities, since December 18, 2007, which indicate, in the aggregate, the
existence of a greater than $50,000 liability or either alone or in aggregation
with other information covered by this
Section 2.05
,
otherwise have a Material Adverse Effect, including, but not limited to,
information relating to governmental, employee, environmental, litigation and
securities matters or proceedings and transactions with affiliates.
(b) None
of the information supplied or to be supplied by CIC for inclusion or
incorporation by reference in (a) any Current Report on Form 8-K or any other
report, form, registration, or other filing made with any Governmental Authority
with respect to the transactions contemplated hereby or (b) the Information
Statement will, at the date it is first mailed to CIC’s stockholders, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Information Statement will comply as to form in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder, except that no representation is made by CIC with
respect to statements made or incorporated by reference therein based solely on
information supplied by Ding Neng in writing for inclusion or incorporation by
reference in the Information Statement. None of the information
supplied or to be supplied by CIC for inclusion in the Information Statement
shall, at the time such document is filed, at the time amended or supplemented,
or at the time the Information Statement is declared effective by the SEC,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
Section
2.06
Absence of Certain Changes
or Events
. Since the date of the most recent CIC balance sheet
included in the CIC SEC Reports:
(a) There
has not been: (i) any material adverse change in the business, operations,
properties, assets or condition of CIC or (ii) any damage, destruction or loss
to CIC (whether or not covered by insurance) materially and adversely affecting
the business, operations, properties, assets or condition of CIC;
(b) CIC
has not: (i) amended its certificate of incorporation or bylaws except as
required by this Agreement; (ii) declared or made, or agreed to declare or make
any payment of dividends or distributions of any assets of any kind whatsoever
to stockholders or purchased or redeemed, or agreed to purchase or redeem, any
of its capital stock; (iii) waived any rights of value which in the aggregate
are outside of the ordinary course of business or material considering the
business of CIC; (iv) made any material change in its method of management,
operation, or accounting; (v) entered into any transactions or agreements of any
kind or nature outside the ordinary course of business; (vi) made any accrual or
arrangement for or payment of bonuses or special compensation of any kind or any
severance or termination pay to any present or former officer or
employee; (vii) increased the rate of compensation payable or to become payable
by it to any of its officers or directors or any of its salaried employees whose
monthly compensation exceeds $10,000; or (viii) made any increase in any profit
sharing, bonus, deferred compensation, insurance, pension, retirement, or other
employee benefit plan, payment, or arrangement, made to, for or with its
officers, directors, or employees;
(c) Except
as disclosed in the CIC SEC Reports, since June 30, 2010, CIC has not: (i)
granted or agreed to grant any options, warrants, or other rights for its stock,
bonds, or other corporate securities calling for the issuance thereof; (ii)
borrowed or agreed to borrow any funds or incurred, or become subject to, any
material obligation or liability (absolute or contingent); (iii) paid or agreed
to pay any material obligations or liabilities (absolute or contingent) other
than current liabilities reflected in or shown on the most recent CIC balance
sheet and current liabilities incurred since that date in the ordinary course of
business and professional and other fees and expenses in connection with the
preparation of this Agreement and the consummation of the transactions
contemplated hereby; (iv) sold or transferred, or agreed to sell or transfer any
of its assets, properties or rights or canceled, or agreed to cancel, any debts
or claims; (vi) made or permitted any amendment or termination of any contract,
agreement, or license to which it is a party if such amendment or termination is
material, considering the business of CIC; or (vii) issued, delivered or agreed
to issue or deliver, any stock, bonds or other corporate securities including
debentures (whether authorized and unissued or held as treasury stock), except
in connection with this Agreement; and
(d) CIC
has not become subject to any law or regulation which materially and adversely
affects, or in the future, may adversely affect, the business, operations,
properties, assets or condition of CIC as described in its financial
statements.
Section
2.07
Litigation and
Proceedings
. There are no actions, suits, orders, proceedings
or investigations pending or, to the knowledge of CIC, threatened by or against
CIC or affecting CIC or its properties, at law or in equity, before any court or
other Governmental Authority or instrumentality, domestic or foreign, or before
any arbitrator of any kind except as disclosed on
Schedule 2.07
of the
CIC Schedules. CIC has no knowledge of any default on its part with
respect to any judgment, order, writ, injunction, decree, award, rule or
regulation of any court, arbitrator, or Governmental Authority or
instrumentality or any circumstance which after reasonable investigation would
result in the discovery of such default.
Section
2.08
Contracts
.
(a) Schedule
2.08 contains any oral or written: (i) contract for the employment of any
officer or employee; (ii) profit sharing, bonus, deferred compensation, stock
option, severance pay, pension benefit or retirement plan, (iii) agreement,
contract, or indenture relating to the borrowing of money, (iv) guaranty of any
obligation; (vi) collective bargaining agreement; or (vii) agreement with any
present or former officer or director of CIC.
(b) The
CIC Material Contracts are valid and enforceable in all respects, except as may
be limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the enforcement of creditors’ rights generally and subject to the qualification
that the availability of equitable remedies are subject to the discretion of the
court before which any proceeding therefore may be brought.
(c) With
respect to each CIC Material Contract: (i) such CIC Material Contract is in full
force and effect; (ii) CIC is not in breach or default in any material respect,
and no event has occurred that with the passage of time or giving of notice or
both would constitute such a breach or default by CIC, or permit termination or
acceleration by the other party, under the CIC Material Contract, except for
violations or defaults that would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect; and (iii) to
CIC’s knowledge, no other party to the CIC Material Contract is in breach or
default in any material respect, and no event has occurred that with the passage
of time or giving of notice or both would constitute such a breach or default by
such other party, or permit termination or acceleration by CIC, under any CIC
Material Contract.
Section
2.09
No
Violations
. The execution and delivery by CIC of this
Agreement and the consummation by CIC of the transactions contemplated hereby,
and compliance by CIC with the provisions hereof, will not (i) conflict with or
violate any provision of the certificate of incorporation or bylaws or other
governing instruments of CIC, (ii) require any consent under or result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation,
amendment or acceleration) under, any CIC Material Contract or by which CIC’s
assets are bound, (iii) result (immediately or with the passage of time or
otherwise) in the creation or imposition of any encumbrance upon any of the
properties, rights or assets of CIC, or (iv) conflict with, contravene or
violate in any respect any law to which CIC or any of its assets or properties
is subject.
Section
2.10
Filings, Consents and
Approvals
. Except for those filings required to be made with
the Delaware Secretary of State, the SEC and the NASDAQ Stock Market, CIC is not
required to obtain any consent, waiver, authorization or order of, give any
notice to, or make any filing or registration with, any court or other foreign,
federal, state, local or other Governmental Authority or other person or entity
in connection with: the execution, delivery and performance by CIC of this
Agreement or any document or instrument contemplated hereby or thereby, or in
connection with the Exchange, the Reverse Split, the Name Change and all other
transactions contemplated hereby. Except for those filings required
to be made with the Delaware Secretary of State, the SEC and the NASDAQ Stock
Market, the execution, delivery and performance by CIC of this Agreement and the
transactions contemplated hereby, and the consummation of the Exchange, do not
and will not require any material registration with, consent or approval of, or
notice to or other action to, with or by, any Governmental
Authority.
Section
2.11
Compliance With Laws and
Regulations
. Except as set forth in
Schedule 2.11
of the
CIC Schedules, CIC is in compliance with all Laws applicable to it and the
conduct of its business as currently conducted. Except as set forth
in
Schedule
2.11
of the CIC Schedules, CIC is not in conflict with, or in default or
violation of, nor has it received any notice of any conflict with, or default or
violation of, (A) any applicable Law by which CIC or any of its property or
assets is bound or affected, or (B) any CIC Material Contract to which CIC is a
party or by which CIC or any property, asset or right of CIC is bound or
affected, except, in each case, for any such conflicts, defaults or violations
that would not reasonably be expected to have a Material Adverse
Effect. Except as set forth in
Schedule 2.11
of the
CIC Schedules, CIC has not received notice of any material violation of, or
noncompliance with, any Law applicable to CIC or directing CIC to take any
remedial action with respect to such applicable Law or otherwise, and no
material deficiencies of CIC have been asserted by any Governmental Authority
with respect to possible violations of any applicable Laws. Except as
set forth in
Schedule
2.11
of the CIC Schedules, CIC has filed all material reports,
statements, documents, registrations, filings or submissions required to be
filed with any regulatory or Governmental Authority, and all such reports,
registrations, filings and submissions are in compliance (and complied at the
relevant time) with applicable Law and no material deficiencies have been
asserted by any such Governmental Authority with respect to any reports,
statements, documents, registrations, filings or submissions required to be
filed by CIC with any Governmental Authority that have not been
remedied.
Section
2.12
NASDAQ Capital Market
Listing
. The Common Stock is listed on the NASDAQ Capital
Market and, except as disclosed in the CIC SEC Reports, there is no action
pending, or to CIC’s knowledge, threatened against CIC by NASDAQ or FINRA with
respect to any intention by such entities to prohibit or terminate the listing
of CIC or the Common Stock.
Section
2.13
Registration of the Common
Stock
. The Common Stock is registered pursuant to Section
12(b) of the Exchange Act and CIC has taken no action designed to, or which is
likely to have the effect of, terminating the registration of the Common Stock
under the Exchange Act nor has CIC received any notification that the SEC is
contemplating terminating such registration. CIC is, and has no
reason to believe that it will not in the foreseeable future continue to be, in
compliance with all such registration requirements.
Section
2.14
Application of Takeover
Protections
. CIC has taken all necessary action, if any, in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under CIC’s organizational documents
(or similar charter documents) that is or could become applicable as a result of
the Exchange.
Section
2.15
Approval of
Agreements
. The Board of Directors and the holders of at least
a majority of the issued and outstanding voting stock of CIC have duly
authorized the execution and delivery of this Agreement by CIC and the
transactions contemplated hereby, including, but not limited to, the Exchange,
Reverse Split and Name Change.
Section
2.16
Material Transactions or
Affiliations
. Except as disclosed in the CIC SEC Reports,
there exists no contract, agreement or arrangement between CIC and any
predecessor and any person or entity who was at the time of such contract,
agreement or arrangement an officer, director, or person owning of record or
known by CIC to own beneficially, 5% or more of the issued and outstanding
Common Stock and which is to be performed in whole or in part after the date
hereof or was entered into since December 31, 2008. Except as
disclosed in the CIC SEC Reports, neither any officer, director, nor 5%
stockholders of CIC has, or has had since December 31, 2008, any known interest,
direct or indirect, in any such transaction with CIC which was material to the
business of CIC. CIC has no commitment, whether written or oral, to
lend any funds to, borrow any money from, or enter into any other transaction
with, any such affiliated person.
Section
2.17
Bank Accounts; Power of
Attorney
. Set forth on
Schedule 2.17
of the
CIC Schedules is a true and complete list of: (a) all accounts with banks, money
market mutual funds or securities or other financial institutions maintained by
CIC within the past twelve (12) months, the account numbers thereof, and all
persons authorized to sign or act on behalf of CIC, (b) all safe deposit boxes
and other similar custodial arrangements maintained by CIC within the past
twelve (12) months, (c) the check ledger for the last 12 months, and (d) the
names of all persons holding powers of attorney from CIC or who are otherwise
authorized to act on behalf of CIC with respect to any matter, other than its
officers and directors, and a summary of the terms of such powers or
authorizations.
Section
2.18
Valid
Obligation
. This Agreement and all agreements and other
documents executed by CIC in connection herewith constitute the valid and
binding obligations of CIC, enforceable in accordance with their respective
terms, except as may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting the enforcement of creditors’ rights generally and
subject to the qualification that the availability of equitable remedies is
subject to the discretion of the court before which any proceeding therefor may
be brought.
Section
2.19
Title to
Property.
Except as disclosed in the CIC SEC Reports, CIC does
not own or lease any real property or personal property, and there are no
options or other contracts under which CIC has a right or obligation to acquire
or lease any interest in real property or personal property.
Section
2.20
Questionable
Payments
.
Neither
CIC nor, to CIC’s knowledge, any of its current 10% or more stockholders,
directors, officers, employees, agents or other persons or entities acting on
behalf of CIC, has on behalf of CIC or in connection with CIC’s business: (a)
used any corporate funds for unlawful contributions, gifts, entertainment or
other unlawful expenses relating to political activity; (b) made any direct or
indirect unlawful payments to any governmental officials or employees from
corporate funds; (c) established or maintained any unlawful or unrecorded fund
of corporate monies or other assets; (d) made any false or fictitious entries on
the books and records of CIC; or (e) made any unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment of any
nature.
Section
2.21
Solvency
. Since
December 31, 2008, CIC has not: (a) made a general assignment for the benefit of
creditors; (b) filed any voluntary petition in bankruptcy or suffered the filing
of any involuntary petition by its creditors; (c) suffered the appointment of a
receiver to take possession of all, or substantially all, of its assets; (d)
suffered the attachment or other judicial seizure of all, or substantially all,
of its assets; (e) except as disclosed in the CIC SEC Reports, admitted in
writing its inability to pay its debts as they come due; or (f) made an offer of
settlement, extension or composition to its creditors generally.
Section
2.22
OFAC
. None
of CIC nor, to the knowledge of CIC, any director, officer, agent, employee,
affiliate or person acting on behalf of CIC, is currently subject to any U.S.
sanctions administered by the Office of Foreign Assets Control of the U.S.
Treasury Department (“
OFAC
”), and CIC has not
heretofore engaged in any transaction to lend, contribute or otherwise make
available its funds or the funds of any joint venture partner or other person or
entity towards any sales or operations in Cuba, Iran, Syria, Sudan, Myanmar or
any other country sanctioned by OFAC or for the purpose of financing the
activities of any person or entity currently subject to any U.S. sanctions
administered by OFAC.
Section
2.23
Intellectual
Property
. Except as disclosed in the CIC SEC Reports, CIC does
not own, license or otherwise have any right, title or interest in any
intellectual property.
Section
2.24
Employees
;
Consultants,
etc.
Except as disclosed in the CIC SEC Reports, CIC has no
employees, officers, directors, agents or consultants. Except as
disclosed in the CIC SEC Reports, CIC maintains no employee benefit plans or
programs of any kind or nature.
Section
2.25
Insurance
. CIC
does not hold or maintain, nor is CIC obligated to hold or maintain, any
insurance on behalf of itself or its assets or for any officer, director,
employee or stockholder of CIC.
Section
2.26
Absence of Certain
Changes
.
(a) Except
as disclosed in the CIC SEC Reports or as set forth in
Schedule 2.26
of the
CIC Schedules, since December 31, 2008, CIC and its subsidiaries have conducted
their respective businesses in the ordinary course of business consistent with
past practice and there has not occurred any action that would constitute a
breach of this
Section
2.26
if such action were to occur or be taken after the date of this
Agreement.
(b) Except
as disclosed in the CIC SEC Reports, since December 31, 2008, there has not been
any fact, change, effect, occurrence, event, development or state of
circumstances that has had or would reasonably be expected to have a Material
Adverse Effect on CIC or any of its subsidiaries.
Section
2.27
Taxes and
Returns
.
(a) Except
as set forth in
Schedule 2.27(a)
of
the CIC Schedules, CIC has or will have timely filed, or caused to be timely
filed, all material federal, state, local and foreign tax returns and reports
required to be filed by it (collectively, “
Tax Returns
”), which such Tax
Returns are true, accurate, correct and complete in all material respects, and
has paid, collected or withheld, or caused to be paid, collected or withheld,
all material taxes required to be paid, collected or withheld, other than such
taxes for which adequate reserves in the CIC Financials have been established in
accordance with GAAP.
Schedule 2.27(a)
of
the CIC Schedules sets forth each jurisdiction where CIC files or is required to
file a Tax Return. There are no claims, assessments, audits,
examinations, investigations or other proceedings pending against CIC in respect
of any Tax, and CIC has not been notified in writing of any proposed Tax claims
or assessments against CIC (other than, in each case, claims or assessments for
which adequate reserves in CIC’s financial statements have been established in
accordance with GAAP or are immaterial in amount). There are no
material encumbrances with respect to any taxes upon any of CIC’s assets, other
than (i) taxes, the payment of which is not yet due, or (ii) taxes or charges
being contested in good faith by appropriate proceedings and for which adequate
reserves in the CIC’s financial statements have been established in accordance
with GAAP. CIC does not have any outstanding waivers or extensions of
any applicable statute of limitations to assess any material amount of
taxes. There are no outstanding requests by CIC for any extension of
time within which to file any Tax Return or within which to pay any taxes shown
to be due on any Tax Return.
(b) CIC
has not constituted either a “distributing corporation” or a “controlled
corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a
distribution of securities (to any Person or entity that is not a member of the
consolidated group of which CIC is the common parent corporation) qualifying
for, or intended to qualify for, tax-free treatment under Section 355 of the
Internal Revenue Code of 1986, as amended (the “
Code
”) (i) within the two-year
period ending on the date hereof or (ii) in a distribution which could otherwise
constitute part of a “plan” or “series of related transactions” (within the
meaning of Section 355(e) of the Code) in conjunction with the
Exchange.
(c) CIC
is not nor (i) has been at any time since December 31, 2008 a United States real
property holding corporation within the meaning of Section 897(c)(2) of the Code
and (ii) since December 31, 2008 has ever been a member of any consolidated,
combined, unitary or affiliated group of corporations for any tax purposes other
than a group of which CIC is or was the common parent corporation.
(d) Except
as disclosed in the CIC SEC Reports or as would not reasonably be expected to
have a Material Adverse Effect, CIC has not made any change in accounting method
or received a ruling from, or signed an agreement with, any taxing
authority.
(e) CIC
is not a party to any contract, agreement, plan or arrangement that,
individually or collectively, could reasonably be expected to give rise to the
payment of any amount that would not be deductible pursuant to Sections 280G or
162(m) of the Code.
(f) CIC
has not participated in, or sold, distributed or otherwise promoted, any
“reportable transaction,” as defined in Treasury Regulation Section
1.6011-4.
(g) CIC
has not taken any action that would reasonably be expected to give rise to (i) a
“deferred intercompany transaction” within the meaning of Treasury Regulation
Section 1.1502-13 or an “excess loss account” within the meaning of Treasury
Regulation Section 1.1502-19, or (ii) the recognition of a deferred intercompany
transaction.
(h) Since
December 31, 2008, CIC has not (i) changed any tax accounting methods, policies
or procedures except as required by a change in law, (ii) made, revoked, or
amended any material tax election, (iii) filed any amended Tax Returns or claim
for refund, or (iv) entered into any closing agreement affecting or otherwise
settled or compromised any material tax liability or refund.
Section
2.28
Restrictions on Business
Activities
. Except for this Agreement, there is no agreement
or other binding provisions upon CIC or any of its subsidiaries which has or
could reasonably be expected to have the effect of prohibiting, preventing,
restricting or impairing in any respect any business practice of CIC or any of
its subsidiaries as their businesses are currently conducted, any acquisition of
property by CIC, the conduct of business by CIC as currently conducted, or
restricting in any material respect the ability of CIC from engaging in business
as currently conducted or from competing with other parties.
Section
2.29
Employee Benefit
Plans
.
(a) Except
as disclosed in the CIC SEC Reports, CIC does not have or maintain any bonus,
pension, profit sharing, deferred compensation, incentive compensation, stock
ownership, stock purchase, stock option, phantom stock, retirement, vacation,
severance, disability, death benefit, hospitalization, medical or other plan,
arrangement or understanding (whether or not legally binding) providing benefits
to any current or former employee, officer or director of CIC.
(b) Except
as otherwise provided in this Agreement, the consummation of the transactions
contemplated by this Agreement will not, either alone or in combination with any
other event or events, (i) entitle any current or former employee, manager,
director or consultant of CIC to any payment (whether of severance pay,
unemployment compensation, golden parachute, bonus or otherwise), (ii)
accelerate, forgive indebtedness, vest, distribute, or increase benefits or an
obligation to fund benefits with respect to any employee or director of CIC, or
(iii) increase the amount of compensation due any such employee, director or
consultant.
Section
2.30
Investment Company
Act
. CIC is not an “investment company” or a person directly
or indirectly “controlled” by or acting on behalf of an “investment company,” in
each case within the meaning of the Investment Company Act of 1940, as
amended.
Section
2.31
Books and
Records
. All of the books and records of CIC are complete and
accurate in all material respects and have been maintained in the ordinary
course and in accordance with applicable Laws and standard industry practices
with regard to the maintenance of such books and records. The
records, systems, controls, data and information of CIC are recorded, stored,
maintained and operated under means (including any electronic, mechanical or
photographic process, whether computerized or not) that are under the exclusive
ownership and direct control of CIC or its accountants (including all means of
access thereto and therefrom).
Section
2.32
Finders and Investment
Bankers
. Except for Maxim Group, LLC, the fees of which will
be borne by Ding Neng and paid pursuant to separate agreement, no broker, finder
or investment banker is entitled to any brokerage, finder’s or other fee or
commission in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of CIC.
Section
2.33
Environmental
Matters
. Except for such matters that are not reasonably
expected to have a Material Adverse Effect, CIC: (i) has, to the knowledge of
CIC, complied with all applicable environmental Laws; (ii) has not received any
notice, demand, letter, claim or request for information alleging that CIC may
be in violation of or liable under any environmental law; and (iii) is not
subject to any order or other arrangement with any Governmental Authority or
subject to any indemnity or other agreement with any third party relating to
liability under any environmental Law.
Section
2.34
Insurance
Business
. Since December 18, 2007, CIC’s operations were
limited to the following, all of which took place in, and were subject solely to
the laws of, the PRC: acting as an insurance agent selling motor vehicle,
property and life insurance, providing website development services and
maintaining a website as an advertising medium for insurance related companies,
developing software for use in the insurance industry and support services
related to the foregoing.
Section
2.35
Business
Practices
. To CIC’s knowledge, none of CIC, any CIC
subsidiary, or any manager, director, officer, or any auditor or accountant of
CIC or any CIC subsidiary or any employee of CIC or any CIC subsidiary has
received any complaint, allegation, assertion or claim, whether or not in
writing, regarding the accounting or auditing practices, procedures,
methodologies or methods of CIC or any CIC subsidiary or their respective
internal accounting controls, including any complaint, allegation, assertion or
claim that CIC or any CIC subsidiary has engaged in questionable accounting or
auditing practices. No attorney representing CIC or any CIC
subsidiary, whether or not employed by CIC or any CIC subsidiary, has reported
evidence of any violation of consumer protection, insurance or securities Laws,
breach of fiduciary duty or similar violation by CIC or any of its officers,
directors, employees or agents to the Board or any committee thereof or to any
director or executive officer of CIC.
Section
2.36
Regulatory Agreements;
Permits
.
(a) There
are no (1) written agreements, consent agreements, memoranda of understanding,
commitment letters, cease and desist orders, or similar undertakings to which
CIC or any CIC subsidiary is a party, on the one hand, and any Governmental
Authority is a party or addressee, on the other hand, (2) orders or directives
of or supervisory letters from a Governmental Authority specifically with
respect to CIC or any CIC subsidiary, or (3) resolutions or policies or
procedures adopted by CIC or a CIC subsidiary at the request of a Governmental
Authority, that (A) limit in any material respect the ability of CIC or any
of the CIC subsidiaries to issue insurance policies, (B) in any manner impose
any requirements on CIC or any of the CIC subsidiaries in respect of risk-based
capital requirements that materially add to or otherwise materially modify in
any respect the risk-based capital requirements imposed under applicable Laws,
(C) require CIC or any of its affiliates to make capital contributions,
purchase surplus notes or make loans to a CIC subsidiary, or (D) in any manner
relate to the ability of CIC or any of the CIC subsidiaries to pay dividends or
otherwise materially restrict the conduct of business of CIC or any of the CIC
subsidiaries in any respect.
(b) CIC
and the CIC subsidiaries hold all permits, licenses, franchises, grants,
authorizations, consents, exceptions, variances, exemptions, orders and other
governmental authorizations, certificates, consents and approvals necessary to
lawfully conduct their businesses as presently conducted and contemplated to be
conducted, and to own, lease and operate their assets and properties
(collectively, the “
CIC
Permits
”), all of which are in full force and effect, and no suspension
or cancellation of any of the CIC Permits is pending or, to the knowledge of
CIC, threatened, except where the failure of any CIC Permits to have been in
full force and effect, or the suspension or cancellation of any of the CIC
Permits, would not reasonably be expected to have, individually or in the
aggregate, a CIC Material Adverse Effect.
Schedule 2.36(b)
of
the CIC Schedules sets forth each CIC Permit. CIC and the CIC
subsidiaries are not in violation in any material respect of the terms of any
CIC Permit.
(c) No
investigation, review or market conduct examination by any Governmental
Authority with respect to CIC or any CIC subsidiary is pending or, to the
knowledge of CIC, threatened, nor does CIC have knowledge of any Governmental
Authority’s intention to conduct any such investigation or review.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF
THE
DING NENG SHAREHOLDERS
As an
inducement to CIC, each Ding Neng Shareholder, severally but not jointly, hereby
represents and warrants to CIC, as of the date hereof and as of the Closing
Date, as follows.
Section
3.01
Ding Neng
Shares
. Such Ding Neng Shareholder is the record and
beneficial owner, and has good title to, the Ding Neng Shares appearing next to
such Ding Neng Shareholder’s name on
Schedule A
hereto. Such Ding Neng Shareholder has the right and authority to
sell and deliver its Ding Neng Shares, free and clear of all liens, claims,
charges, encumbrances, pledges, mortgages, security interests, options, rights
to acquire, proxies, voting trusts or similar agreements (collectively, the
“
Liens
”), restrictions
on transfer or adverse claims of any nature whatsoever, except as disclosed in
Schedule 3.01
to the Ding Neng Schedules. Upon delivery of any certificate or
certificates duly assigned, representing the Ding Neng Shares as herein
contemplated and/or upon the registering of CIC as the new owner of the Ding
Neng Shares in the share register of Ding Neng, CIC will receive good title to
the Ding Neng Shares owned by such Ding Neng Shareholder free and clear of any
Liens.
Section
3.02
Power and Authority
.
Such Ding Neng Shareholder has the legal power, capacity and authority to
execute and deliver this Agreement to consummate the transactions contemplated
by this Agreement, and to perform his, her or its obligations under this
Agreement. This Agreement constitutes a legal, valid and binding
obligation of such Ding Neng Shareholder, enforceable against such Ding Neng
Shareholder in accordance with the terms hereof, except as may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors’ rights generally and subject to the qualification that
the availability of equitable remedies is subject to the discretion of the court
before which any proceeding therefore may be brought.
Section
3.03
No
Conflicts.
The execution and delivery of this Agreement by
such Ding Neng Shareholder and the performance by such Ding Neng Shareholder of
its obligations hereunder in accordance with the terms hereof: (a) will not
require the consent of any third party or Governmental Authority under any Laws;
(b) will not violate any Laws applicable to such Ding Neng Shareholder and (c)
will not violate or breach any contractual obligation to which such Ding Neng
Shareholder is a party.
Section
3.04
Purchase Entirely for Own
Account
. Such Ding Neng Shareholder is acquiring the Exchange
Shares pursuant to the terms hereof for investment for such Ding Neng
Shareholder’s own account and not as a nominee or agent, and not with a view to
the resale or distribution of any part thereof and such Ding Neng Shareholder
has no present intention of selling or otherwise distributing the Exchange
Shares, except in compliance with applicable securities laws.
Section
3.05
Acquisition of Exchange
Shares for Investment
.
(a) Such
Ding Neng Shareholder represents and warrants that he: (i) can bear the economic
risk of his investment in the Exchange Shares, and (ii) possesses such knowledge
and experience in financial and business matters that he is capable of
evaluating the merits and risks of an investment in the Exchange
Shares.
(b) Such
Ding Neng Shareholder is not a “U.S. Person” as defined in Rule 902(k) of
Regulation S of the Securities Act (“
Regulation S
”) and understands
that the Exchange Shares are not registered under the Securities Act and that
the issuance thereof to such Ding Neng Shareholder is intended to be exempt from
registration under the Securities Act pursuant to Regulation S. Such
Ding Neng Shareholder has no intention of becoming a U.S. Person. At
the time of the origination of contact concerning this Agreement and the date of
the execution and delivery of this Agreement, such Ding Neng Shareholder was
outside of the United States.
(c) Such
Ding Neng Shareholder acknowledges that neither the SEC, nor the securities
regulatory body of any state or other jurisdiction, has received, considered or
passed upon the accuracy or adequacy of the information and representations made
in this Agreement.
(d) Such
Ding Neng Shareholder understands that the Exchange Shares may not be sold,
transferred, or otherwise disposed of unless in accordance with the provisions
of Regulation S, pursuant to registration under the Securities Act or an
exemption therefrom, and that in the absence of an effective registration
statement covering the Exchange Shares or any available exemption from
registration under the Securities Act, the Exchange Shares may have to be held
indefinitely.
(e) Such
Ding Neng Shareholder understands that he may not engage in hedging transactions
with regards to the Exchange Shares unless in compliance with the Securities
Act.
(f) Such
Ding Neng Shareholder understands that the Exchange Shares have not been
registered under the Securities Act and, if issued in accordance with the
provisions of this Agreement, will be issued by reason of a specific exemption
from the registration provisions of the Securities Act that depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
such Ding Neng Shareholder’s representations as expressed herein.
ARTICLE
IV
PLAN
OF EXCHANGE
Section
4.01 The Exchange.
(a) On
the terms and subject to the conditions set forth in this Agreement, on the
Closing Date each Ding Neng Shareholder shall assign, transfer and deliver, free
and clear of all Liens, all of the Ding Neng Shares owned by such Ding Neng
Shareholder, as set forth opposite such Ding Neng Shareholder’s name on
Schedule A
, to
CIC.
(b)
In
consideration of the transfer of the Ding Neng Shares to CIC by the Ding Neng
Shareholders, CIC shall cause the Exchange Shares to be issued to the Ding Neng
Shareholders in the amounts set forth on
Schedule A
hereto,
representing in the aggregate 85% of the issued and outstanding shares of Common
Stock immediately following the Closing, pursuant to an irrevocable letter
executed by CIC, addressed to Corporate Stock Transfer, Inc., CIC’s transfer
agent (the
“Transfer Agent
Letter”
), attached hereto as
Exhibit A
, and dated
as of the Closing Date. Notwithstanding the foregoing, in the event
Greenstone Holdings Group LLC, or any of its subsidiaries, affiliates or related
parties (collectively,
“Greenstone”
) owns
any shares of Common Stock, directly or indirectly (including shares of Common
Stock underlying warrants, options or other derivative securities convertible
into shares of Common Stock), or has the right to receive or acquire shares of
Common Stock, the Ding Neng Shareholders shall be entitled to receive an
additional number of shares of Common Stock such that the Ding Neng Shareholders
actually received an aggregate number of shares of Common Stock equal to 85% of
the issued and outstanding shares of Common Stock immediately following the
Closing. The provisions of this Section 4.01(b) shall survive the
Closing for a period of two (2) years.
(c) On
the Closing Date, each Ding Neng Shareholder shall, on surrender of its
certificate or certificates representing the Ding Neng Shares owned by such Ding
Neng Shareholder, be entitled to receive the Exchange Shares.
(d) Immediately
after the Closing, CIC shall issue to Maxim Group, LLC or its designated
affiliate(s) (collectively, “
Maxim
”) a number of newly
issued shares of Common Stock representing an aggregate of 4.5% of
the issued and outstanding Common Stock immediately following the Closing (the
“
Maxim
Shares
”). If at any time on or after the Closing CIC proposes
to file a registration statement under the Securities Act with respect to an
offering of equity securities, or securities or other obligations exercisable or
exchangeable for, or convertible into, equity securities, by CIC for its own
account or for shareholders of CIC for their account, other than a registration
statement (i) filed in connection with any employee stock option or other
benefit plan, (ii) for an exchange offer or offering of securities solely to
CIC’s existing shareholders, (iii) for an offering of debt that is convertible
into equity securities of CIC or (iv) for a dividend reinvestment plan, then CIC
shall (x) give written notice of such proposed filing to Maxim as soon as
practicable but in no event less than twenty (20) days before the first
anticipated filing date of the registration statement with the SEC, and (y)
offer to Maxim in such notice the opportunity to register the sale of such
number of Maxim Shares as Maxim may request in writing within ten (10) days
following receipt of such notice.
(e) No
certificates or scrip representing fractional shares or book-entry credit of the
same shall be issued upon the surrender of the Ding Neng Shares for the Exchange
Shares. Each Ding Neng Shareholder who receives Exchange Shares who
would otherwise have been entitled to receive a fraction of a share of Common
Stock shall have such fractional share rounded up to the nearest whole
number.
Section
4.02
Closing
. The
Closing shall take place at the offices of Troutman Sanders LLP, 405 Lexington
Avenue, New York, New York, within 10 days of notification of satisfaction (or
waiver) of the conditions to the Closing set forth in Articles VI and VII below
(or such later date as is mutually agreed to by the parties
hereto).
Section
4.03
Closing
Events
. At the Closing, CIC, Ding Neng and the Ding Neng
Shareholders shall execute, acknowledge, and deliver (or shall ensure to be
executed, acknowledged, and delivered), any and all certificates, opinions,
financial statements, schedules, agreements, resolutions, rulings and such other
documents and instruments required by this Agreement to be so delivered at or
prior to the Closing, together with such other items as may be reasonably
requested by the parties hereto and their respective legal counsel in order to
effectuate or evidence the transactions contemplated hereby.
ARTICLE
V
OTHER
AGREEMENTS AND COVENANTS
Section
5.01
Legends
. Each
Ding Neng Shareholder acknowledges and agrees that each certificate representing
the Exchange Shares shall be endorsed with the following legends, in addition to
any other legend required to be placed thereon by applicable federal or state
securities laws:
“THE
SECURITIES ARE BEING OFFERED TO INVESTORS WHO ARE NOT U.S. PERSONS (AS DEFINED
IN REGULATION S UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“SECURITIES ACT”))
AND WITHOUT REGISTRATION WITH THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION UNDER THE SECURITIES ACT IN RELIANCE UPON REGULATION S PROMULGATED
UNDER THE SECURITIES ACT.”
“TRANSFER
OF THESE SECURITIES IS PROHIBITED, EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
REGULATION S, PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT, OR PURSUANT TO
AVAILABLE EXEMPTION FROM REGISTRATION. HEDGING TRANSACTIONS MAY NOT
BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.”
Section
5.02
Delivery of Books and
Records
. At the Closing, CIC shall deliver to the officers and
directors of the post-acquisition entity the originals of the corporate minute
books, books of account, contracts, records, and all other books or documents of
CIC which is now in the possession of CIC or its representatives.
Section
5.03
Third Party Consents and
Certificates
. The parties hereto agree to cooperate with each
other in order to obtain any required third party consents to this Agreement and
the transactions herein contemplated.
Section
5.04
Director and
Officer
. Concurrently with the Closing: (i) Zhenyu Wang shall
resign from his positions as the CEO and director of CIC, effective as of the
Closing Date and, immediately thereafter, he shall enter into a new employment
agreement with CIC, a form of which is attached hereto as
Exhibit B
, (ii) CIC
shall appoint: Xinfeng Nie as Chairman of the Board of Directors of
CIC.
Section
5.05
Assistance with Post-Closing
SEC Reports and Inquiries
. Following the Closing Date,
CIC shall cause Zhenyu Wang to use his reasonable best efforts to provide such
information available to him, including information, filings, reports, financial
statements or other circumstances of CIC occurring, reported or filed prior to
the Closing, as required by CIC for the preparation of the reports which CIC
will be required to file after Closing with the SEC to remain in compliance and
current with its reporting requirements under the Exchange Act.
Section
5.06
No
Solicitation
.
(a) CIC
and each member of the Group shall not, nor shall they authorize or permit any
of their directors, officers or employees or any investment banker, financial
advisor, attorney, accountant or other advisor, agent or representative
(collectively, “Representatives”) retained by them or any of their respective
affiliates to, directly or indirectly through another person, (i) solicit,
initiate or encourage, or take any other action designed to, or which could
reasonably be expected to, facilitate, any Takeover Proposal (defined below) or
(ii) enter into, continue or otherwise participate in any discussions or
negotiations regarding, or furnish to any person any information, or otherwise
cooperate in any way with, any Takeover Proposal. Without limiting the
foregoing, it is agreed that any violation of the restrictions set forth in the
preceding sentence by either CIC or the Group shall be a breach of this
Section 5.06
.
Such party shall immediately cease and cause to be terminated any existing
discussions or negotiations with any person conducted heretofore with respect to
any Takeover Proposal and request the prompt return or destruction of all
confidential information previously furnished to such person(s).
(b) Notwithstanding
any other provision of this Agreement, at any time prior to Closing, in response
to a bona fide written Takeover Proposal that the Board of Directors of CIC
determines in good faith by a majority vote of the disinterested members thereof
(after consultation with outside counsel) constitutes or would reasonably be
expected to lead to a Superior Proposal, and which Takeover Proposal was not
solicited after the date hereof and was made after the date hereof and did not
otherwise result from a breach of this
Section 5.06
,
CIC may, if its Board of Directors determines in good faith by a majority vote
of the disinterested members thereof (after consultation with outside counsel)
that it is required to do so in order to comply with its fiduciary duties to the
stockholders of CIC under applicable law (x) furnish information with
respect to CIC to the person making such Takeover Proposal (and its
Representatives) pursuant to a customary confidentiality agreement (a copy of
which shall be provided to the Group);
provided
that all
such information has previously been provided to the Group or is provided to the
Group prior to or substantially concurrent with the time it is provided to such
person, and (y) participate in discussions or negotiations with the person
making such Takeover Proposal (and its Representatives) regarding such Takeover
Proposal.
(c) In
addition to the obligations of Seller Parties set forth above in this
Section 5.06
,
the recipient of any Takeover Proposal shall promptly advise the other parties
to this Share Exchange Agreement, orally and in writing, of any Takeover
Proposal, the material terms and conditions of any such Takeover Proposal or
inquiry (including any material changes thereto) and the identity of the person
making any such Takeover Proposal or inquiry. The notifying party shall
(i) keep all other parties promptly and reasonably informed of the status
and details (including any material change to the terms thereof) of any such
Takeover Proposal or inquiry and (ii) provide to all other parties as soon
as practicable after receipt or delivery thereof with copies of all material
correspondence and other written material sent or provided to the notifying
party from any person that is described in any of the terms or conditions of any
Takeover Proposal.
(d) The
term “Takeover Proposal” means any inquiry, proposal or offer from any Person
relating to, or that would reasonably be expected to lead to, any direct or
indirect acquisition or purchase, in one transaction or a series of
transactions, of more than 15% of any class of equity securities or assets of
CIC or any member of the Group, as applicable, or any merger, consolidation,
business combination, recapitalization, liquidation, dissolution, joint venture,
binding share exchange or similar transaction pursuant to which any person or
the stockholders of any person would own 15% or more of any class of equity
securities or assets of CIC or any member of the Group, other than the
transactions contemplated by this Agreement.
(e) The
term “Superior Proposal” means any bona fide offer made by a third party that if
consummated would result in such person (or its stockholders) owning, directly
or indirectly, more than 50% of the shares of CIC’s equity securities then
outstanding (or of the surviving entity in a merger or the direct or indirect
parent of the surviving entity in a merger), which the Board of Directors of CIC
determines in good faith by a majority vote of the disinterested members thereof
(after consultation with outside counsel and receipt of a valuation report from
an independent, third party investment bank reasonably acceptable to Ding Neng)
to be (i) more favorable to the stockholders of the CIC from a financial
point of view than the Exchange (taking into account all the terms and
conditions of such proposal and this Agreement (including any changes to the
terms of this Agreement proposed by the Group in response to such offer or
otherwise)) and (ii) reasonably capable of being completed, taking into
account all financial, legal, regulatory and other aspects of such
proposal.
Section
5.07
Conduct of
Business
. During the period from the date hereof through the
Closing Date, CIC, Ding Neng, DBT, WOFE and Ding Neng Bio-Tech shall carry on
their respective businesses in the ordinary and usual course consistent with
past practice and shall not sell, pledge, or assign any assets, without the
prior written approval of the other party, except in the regular course of
business. Except as set forth in this Agreement, CIC shall not amend
its Certificate of Incorporation or its Amended and Restated
Bylaws. CIC, Ding Neng, DBT, WOFE and Ding Neng Bio-Tech may not
declare dividends, redeem or sell stock or other securities, incur additional or
newly-funded liabilities, acquire or dispose of fixed assets, enter into any
material or long-term contract, guarantee obligations of any third party, settle
or discharge any balance sheet receivable for less than its stated amount, pay
more on any liability than its stated amount, or enter into any other
transaction other than in the regular course of business.
ARTICLE
VI
CONDITIONS
PRECEDENT TO OBLIGATIONS OF CIC
The
obligations of CIC under this Agreement are subject to the satisfaction, on or
before the Closing Date, of the following conditions:
Section
6.01
Accuracy of Representations
and Performance of Covenants
. The representations and
warranties made by Ding Neng and the Ding Neng Shareholders in this Agreement
were true when made and shall be true at the Closing Date. Ding Neng
and the Ding Neng Shareholders shall have performed or complied with all
covenants and conditions required by this Agreement to be performed or complied
with by them prior to or at the Closing.
Section
6.02
Officer’s
Certificate
. CIC shall have been furnished with a certificate,
in the form attached hereto as
Exhibit C
, dated the
Closing Date and signed by a duly authorized officer of Ding Neng to the effect
that no litigation, proceeding, investigation, or inquiry is pending, or to the
best knowledge of Ding Neng threatened, which might result in an action to
enjoin or prevent the consummation of the transactions contemplated by this
Agreement, or, to the extent not disclosed in the Ding Neng Schedules, which
might result in any material adverse change in any of the assets, properties,
business, or operations of the Group.
Section
6.03
Good
Standing
. CIC shall have received certificates of good
standing from Ding Neng, DBT, WOFE and Ding Neng Bio-Tech, dated as of no less
than ten (10) business days prior the Closing Date, certifying that Ding Neng is
in good standing as a company in the British Virgin Islands, DBT is in good
standing as a company in Hong Kong, WOFE is in good standing as a company in the
PRC and Ding Neng Bio-Tech is in good standing as a company in the
PRC.
Section
6.04
No Governmental
Prohibition
. No order, statute, rule, regulation, executive
order, injunction, stay, decree, judgment or restraining order shall have been
enacted, entered, promulgated or enforced by any court or governmental or
regulatory authority or instrumentality which prohibits the consummation of the
transactions contemplated hereby.
Section
6.05
Consents
. All
consents, approvals, waivers or amendments pursuant to all contracts, licenses,
permits, trademarks and other intangibles in connection with the transactions
contemplated herein, or for the continued operation of Ding Neng and the Group
after the Closing Date on the basis as presently operated shall have been
obtained.
ARTICLE
VII
CONDITIONS
PRECEDENT TO OBLIGATIONS OF
DING
NENG AND THE DING NENG SHAREHOLDERS
The
obligations of Ding Neng and the Ding Neng Shareholders under this Agreement are
subject to the satisfaction, at or before the Closing Date, of the following
conditions:
Section
7.01
Accuracy of Representations
and Performance of Covenants
.
(a) The
representations and warranties made by CIC in this Agreement were true when made
and shall be true as of the Closing Date with the same force and effect as if
such representations and warranties were made at and as of the Closing
Date. Additionally, CIC shall have performed and complied with all
covenants and conditions required by this Agreement to be performed or complied
with by CIC;
(b) CIC
shall have effectuated the Reverse Split; and
(c) The
Name Change shall have been approved by all required actions of CIC, NASDAQ and
FINRA.
Section
7.02
Maintenance of
Listing
.
CIC shall
continuously be listed on the NASDAQ Capital Market, the OTC Bulletin Board or
the Pink Sheets LLC from the date hereof through the Closing
Date.
Section
7.03
Termination of
Agreement
. That certain letter agreement by and between CIC
and Greenstone dated July 1, 2010 shall have been terminated in all respects,
including, without limitation, any obligation to register any shares of Common
Stock owned by Greenstone, including any Common Stock underlying any warrants or
other derivative securities owned by Greenstone.
Section
7.04
Transfer Agent
Letter
. Ding Neng shall have received the Transfer Agent
Letter.
Section
7.05
Closing
Certificate
. The Ding Neng Shareholders shall have been
furnished with a certificate dated as of the Closing Date and signed by duly
authorized executive officers of CIC, certifying that no litigation, proceeding,
investigation or inquiry is pending, or to the best knowledge of CIC threatened,
which might result in an action to enjoin or prevent the consummation of the
transactions contemplated by this Agreement or, to the extent not disclosed in
the CIC Schedules, by or against CIC, which might result in any material adverse
change in the listing of any CIC securities or any of the assets, properties or
operations of CIC, a form of which is attached hereto as
Exhibit
D
.
Section
7.06
Officer’s
Certificate
. The Ding Neng Shareholders shall have been
furnished with a certificate dated the Closing Date and signed by duly
authorized executive officers of CIC, certifying as to the existing liabilities
of CIC as of the Closing Date and that each of the representations and
warranties of CIC contained in this Agreement are true and correct on and as of
the Closing Date, a form of which is attached hereto as
Exhibit
E
.
Section
7.07
Secretary’s
Certificate
. The Ding Neng Shareholders shall have been
furnished with a certificate dated the Closing Date and signed by the secretary
of CIC, certifying to the Ding Neng Shareholders the resolutions adopted by the
Board of Directors of CIC approving, as applicable, the transactions
contemplated by this Agreement and the issuance of the Exchange Shares,
certifying the current versions of its certificates of incorporation and bylaws
or other organizational documents, certifying as to the signatures and authority
of persons signing this Agreement and related documents on its behalf, a form of
which is attached hereto as
Exhibit
F
.
Section
7.08
Good
Standing
. CIC shall have delivered to Ding Neng a certificate
of good standing from the Secretary of State of Delaware, dated as of a date
within ten days prior to the Closing Date, certifying that CIC is in good
standing as a corporation in the State of the Delaware.
Section
7.09
No Governmental
Prohibition
. No order, statute, rule, regulation, executive
order, injunction, stay, decree, judgment or restraining order shall have been
enacted, entered, promulgated or enforced by any court or governmental or
regulatory authority or instrumentality which prohibits the consummation of the
transactions contemplated hereby.
Section
7.10
Consents
. All
consents, approvals, waivers or amendments pursuant to all contracts, licenses,
permits, trademarks and other intangibles in connection with the transactions
contemplated herein, or for the continued operation of CIC after the Closing
Date on the basis as presently operated, shall have been obtained.
Section
7.11
Existing Liabilities
.
As of the Closing Date, the existing liabilities of CIC do not exceed $500,000,
including, without limitation, all of CIC’s accounts payable, taxes of any kind
or nature (whether due or to become due) and any outstanding legal or other
fees, costs and expenses, all as incurred prior to the Closing
Date.
ARTICLE
VIII
INDEMNIFICATION
Section
8.01
Indemnification by
Wang
.
(i) From
the date of this Agreement through the one year anniversary of the Closing Date,
Zhenyu Wang (“
Wang
”)
shall indemnify and hold harmless Ding Neng, their affiliates and each of their
respective successors and assigns, and their respective officers, directors,
employees and agents (each, a “
Ding Neng Indemnified Party
”)
from and against liabilities, claims (including claims by third parties),
demands, judgments, losses, costs, damages or expenses whatsoever (including
reasonable attorneys’, consultants’ and other professional fees and
disbursements of every kind, nature and description) (the “
Ding Neng Damages
”) that such
Ding Neng Indemnified Party may sustain, suffer or incur and that result from,
arise out of or relate to (i) any material breach or inaccuracy by CIC or any
CIC subsidiary or affiliate (whether existing before or on the Closing Date) of
any of their representations, warranties, covenants or agreements contained in
this Agreement, and/or (ii) any fraud committed by or the willful breach of this
Agreement by, CIC, any CIC’s subsidiary or affiliate on or prior to the Closing
Date (whether existing before or on the Closing Date).
(ii)
Indemnification
Procedures
. A Ding Neng Indemnified Party seeking indemnification under
this
Section
8.01
(a “
Ding Neng
Indemnitee
”) must give timely written notice to Wang as soon as practical
after a Ding Neng Indemnitee becomes aware of any condition or event that gives
rise to Ding Neng Damages for which indemnification is sought under this Article
VIII and in no event later than the one year anniversary of the Closing
Date. Wang will have no liability under this
Section 8.01
unless
the written notice required by the preceding sentence is given by the date
specified. In the event a claim or demand is made by a party against
a Ding Neng Indemnitee, the Ding Neng Indemnitee shall promptly notify Wang of
such claim or demand, specifying in reasonable detail the nature of the Ding
Neng Damages for which indemnification is sought, which sets forth the basis for
such Ding Neng losses and the amount, to the extent then known by the Ding Neng
Indemnified Party (the “
Claim
Notice
”).
(A) If
such Claim Notice states the amount of the Ding Neng Damages claimed and Wang
notifies such Ding Neng Indemnitee that he does not dispute the claim described
in the Claim Notice, the Ding Neng Damages specified on the Claim Notice will be
admitted by Wang and Wang will pay the amount of such Ding Neng Damages claimed
to the Ding Neng Indemnitee within 30 days of Wang’s notification that he does
not dispute the claim described in the Claim Notice.
(B) If
Wang shall notify the Ding Neng Indemnitee within thirty (30) days after receipt
of the Claim Notice whether Wang will undertake, conduct and control, through
counsel of its own choosing (subject to the consent of the Ding Neng Indemnitee,
such consent not to be unreasonably withheld or delayed) and at his expense, the
settlement or defense thereof, then such Ding Neng Indemnitee shall cooperate
with Wang in connection therewith; provided that if Wang undertakes such
defense: (i) Wang shall not thereby permit to exist any encumbrance or other
adverse charge upon any asset of Ding Neng Indemnitee, except by operation of
law, or settle such action without first obtaining the written consent of Ding
Neng Indemnitee, which consent shall not be unreasonable withheld or delayed,
except for settlements solely covering monetary matters for which Wang has
acknowledged responsibility for payment; and (ii) Wang shall permit Ding Neng
Indemnitee (at such Ding Neng Indemnitee’s sole cost and expense) to participate
in such settlement or defense through counsel chosen by Ding Neng
Indemnitee. The Indemnitee agrees to preserve and provide access to
all evidence that may be useful in defending against such claim and to provide
reasonable cooperation in the defense thereof or in the prosecution of any
action against a third party in connection therewith. Wang’s defense of any
claim or demand shall not constitute an admission or concession of liability
therefor or otherwise operate in derogation of any rights Wang may have against
Ding Neng Indemnitee or any third party. So long as Wang is
reasonably contesting any such claim in good faith, the Ding Neng Indemnitee
shall not pay or settle any such claim. If Wang does not notify Ding
Neng Indemnitee within thirty (30) days after receipt of Ding Neng Indemnitee’s
Claim Notice that (1) he does not dispute the claim pursuant to
Section
8.01(a)(ii)(A)
, and (2) he does not notify the Ding Neng Indemnitee that
he elects to undertake the defense thereof, such Ding Neng Indemnitee shall have
the right to contest, settle or compromise the claim in the exercise of its
exclusive discretion at the expense of Wang (provided that Wang shall not be
required to pay such Ding Neng Indemnitee's expenses for the defense, settlement
or compromise of claims which are not covered by Wang’s obligations under this
Article VIII. Pursuant to such action under this
Section
8.01(a)(ii)(B)
, Wang will pay the Ding Neng Indemnitee’s Ding Neng
Damages within 30 days following the determination of the Ding Neng Indemnitee’s
Ding Neng Damages (whether such determination is made pursuant to this
Section 8.01(a)
, by
agreement between Wang and the Ding Neng Indemnitee, by arbitration award or by
final adjudication), except for those costs expressly assumed by the Ding Neng
Indemnitee hereunder.
(iii) Wang
will indemnify a Ding Neng Indemnitee pursuant to this
Section 8.01(a)
only
if the aggregate amount of all of the Ding Neng Damages of such Ding Neng
Indemnitee exceeds $50,000 (the “
Basket Amount
”), in which case
Wang will be liable for the first $50,000 of such liability plus all amounts in
excess of the Basket Amount.
ARTICLE
IX
MISCELLANEOUS
Section
9.01
Termination; Effect of
Termination
. This Agreement may be terminated and the Exchange
and the other transactions contemplated hereby may be abandoned at any time
prior to the Closing, notwithstanding any approval of any matters presented in
connection with the Exchange by the stockholders of CIC (the date of any such
termination, the “
Termination
Date
”), as follows:
(a) by
unanimous written consent of CIC, Ding Neng and the Ding Neng Shareholders, as
duly authorized by the Boards of Directors of each of CIC and Ding
Neng;
(b) by
written notice by CIC if the Closing conditions set forth in Article VI have not
been satisfied by Ding Neng or the Ding Neng Shareholder, as the case may be (or
waived by CIC). Notwithstanding the foregoing, the right to terminate
this Agreement under this
Section 9.01(b)
shall
not be available to CIC due primarily to failure by CIC to fulfill any
obligation under this Agreement or if CIC is in material breach of any
representation, warranty or covenant contained in this Agreement, and such
breach has primarily caused such Closing condition to not be
satisfied;
(c) by
written notice by either Ding Neng or any Ding Neng Shareholder if the Closing
conditions set forth in Article VII have not been satisfied by CIC (or waived by
Ding Neng and the Ding Neng Shareholders). Notwithstanding the
foregoing, the right to terminate this Agreement under this
Section 9.01(c)
shall
not be available to: (1) Ding Neng due primarily to the failure by Ding Neng to
fulfill any obligation under this Agreement or if Ding Neng is in material
breach of any representation, warranty or covenant contained in this Agreement,
and such breach has primarily caused such Closing condition to not be satisfied,
or (2) any Ding Neng Shareholder due primarily to the failure by such Ding Neng
Shareholder to fulfill any obligation under this Agreement or if such Ding Neng
Shareholder is in material breach of any representation, warranty or covenant
contained in this Agreement, and such breach has primarily caused such Closing
condition to not be satisfied;
(d) by
written notice by either CIC or Ding Neng if any Governmental Authority shall
have enacted, issued, promulgated, enforced or entered any order or law that is,
in each case, then in effect and is final and not appealable and has the effect
of permanently restraining, enjoining or otherwise preventing or prohibiting the
transactions contemplated by this Agreement;
provided
,
however
, the right to
terminate this Agreement under this
Section 9.01(d)
shall
not be available to any party whose failure to fulfill any obligation under this
Agreement has been the primary cause of, or resulted in, any such order or law
to have been enacted, issued, promulgated, enforced or entered;
(e) by
written notice by any party hereto if (i) there has been a breach by any other
party hereto of any of its material representations, warranties, covenants or
agreements contained in this Agreement, or if any material representation or
warranty of any other party shall have become untrue or inaccurate, and (ii) the
breach or inaccuracy is incapable of being cured prior to the Closing or is not
cured within twenty (20) days of notice of such breach or inaccuracy;
or
(f) by
written notice by CIC or Ding Neng, if either party discovers any fact or
circumstance that has, or could reasonably be expected to have, a Material
Adverse Effect, that was discovered in connection with the completion of the due
diligence review of the other parties hereto.
(g) In
the event of the termination of this Agreement pursuant to this
Section 9.01
, this
Agreement shall forthwith become void, and there shall be no liability on the
part of any Party or any of their respective affiliates or the directors,
officers, partners, members, managers, employees, agents or other
representatives of any of them, and all rights and obligations of each Party
shall cease, except: (i) as set forth in
Article VIII
, this
Section 9.01
and in
Section
9.07
and (ii) nothing herein shall relieve any Party from liability for
any fraud committed by the willful breach of this Agreement prior to
termination.
Article VIII
, this
Section 9.01
and
Section
9.07
shall survive the termination of this Agreement.
Section
9.02
Governing Law;
Venue
. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law
thereof. Each party agrees that all legal proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Agreement (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be
commenced exclusively in the state and federal courts sitting in the City of New
York. Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
New York for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein, and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such
court or that such suit, action or proceeding is improper. Each party
hereto hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law. EACH PARTY HERETO (INCLUDING ITS AFFILIATES, AGENTS,
OFFICERS, DIRECTORS AND EMPLOYEES) HEREBY IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
Section
9.03
Notices
. All
notices, requests, demands and other communications provided in connection with
this Agreement shall be in writing and shall be deemed to have been duly given
at the time when hand delivered, delivered by express courier, or sent by
facsimile (with receipt confirmed by the sender’s transmitting device) in
accordance with the contact information provided below or such other contact
information as the parties may have duly provided by notice.
If
to CIC:
China
INSOnline Corp.
Room 42,
4F, New Henry House, 10 Ice House Street, Central
Hong
Kong
Attention:
Zhenyu Wang
Fax
Number: (646) 512-5857
with
a copy (which shall not constitute notice) to:
Troutman
Sanders LLP
405
Lexington Avenue
New York,
New York 10174
Attention:
Henry I. Rothman
Fax
Number: (212) 704-5950
If
to Ding Neng or the Ding Neng Shareholders, to:
Pudong
Building, 2
nd
Floor,
Jiulong Avenue, Longwen District
Zhangzhou
City, Fujian Province 363000, China
Attention:
Jingmei Weng
Fax
Number:
86 (0)
596 2967018
with
a copy (which shall not constitute notice) to:
Ellenoff
Grossman & Schole LLP
150 East
42
nd
Street, 11
th
Floor
New York,
NY 10017
Attention:
Barry I. Grossman, Esq.
Fax
Number: (212) 370-7889
Any such
notice or communication shall be deemed to have been given: (i) upon receipt, if
personally delivered, (ii) on the day after dispatch, if sent by overnight
courier, (iii) upon dispatch, if transmitted by facsimile and receipt is
confirmed by printed receipt and (iv) three (3) days after mailing, if sent by
registered or certified mail.
Section
9.04
Confidentiality
. Each
party hereto agrees with the other that, unless and until the transactions
contemplated by this Agreement have been consummated, it and its representatives
will hold in strict confidence all data and information obtained with respect to
another party or any subsidiary thereof from any representative, officer,
director or employee, or from any books or records or from personal inspection,
of such other party, and shall not use such data or information or disclose the
same to others, except: (i) to the extent such data or information is published,
is a matter of public knowledge, or is required by law to be published; or (ii)
to the extent that such data or information must be used or disclosed in order
to consummate the transactions contemplated by this Agreement. In the
event of the termination of this Agreement, each party shall return to the other
party all documents and other materials obtained by it or on its behalf and
shall destroy all copies, digests, work papers, abstracts or other materials
relating thereto, and each party will continue to comply with the
confidentiality provisions set forth herein.
Section
9.05
Schedules;
Knowledge
. Each party is presumed to have full knowledge of
all information set forth in the other party’s schedules delivered pursuant to
this Agreement.
Section
9.06
No Third Party
Beneficiaries
. This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person or entity.
Section
9.07
Expenses
. Whether
or not the Exchange is consummated, each of the parties hereto will bear their
own respective expenses, including legal, accounting and professional fees,
incurred in connection with the Exchange or any of the other transactions
contemplated hereby.
Section
9.08
Entire
Agreement
. This Agreement represents the entire agreement
between the parties relating to the subject matter thereof and supersedes all
prior agreements, understandings and negotiations, written or oral, with respect
to such subject matter.
Section
9.09
Counterparts
. This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
Section
9.10
Amendment or
Waiver
. Every right and remedy provided herein shall be
cumulative with every other right and remedy, whether conferred herein, at law,
or in equity, and may be enforced concurrently herewith, and no waiver by any
party of the performance of any obligation by the other shall be construed as a
waiver of the same or any other default then, theretofore, or thereafter
occurring or existing. At any time prior to the Closing Date, this
Agreement may by amended by a writing signed by all parties hereto, with respect
to any of the terms contained herein, and any term or condition of this
Agreement may be waived or the time for performance may be extended by a writing
signed by the party or parties for whose benefit the provision is
intended.
Section
9.11
Best
Efforts
. Subject to the terms and conditions herein provided,
each party shall use its best efforts to perform or fulfill all conditions and
obligations to be performed or fulfilled by it under this Agreement so that the
transactions contemplated hereby shall be consummated as soon as
practicable. Each party also agrees that it shall use its best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective this Agreement and the transactions
contemplated herein, both prior to and following the Closing.
[Signature
Pages Follow]
IN WITNESS WHEREOF
, the
parties hereto have executed and delivered this Share Exchange Agreement as of
the date first written above.
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CHINA
INSONLINE CORP.
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By:
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/s/ ZhenyuWang
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Name:
ZhenyuWang
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Title: Chief
Executive Officer
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DING
NENG HOLDINGS LIMITED
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By:
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/s/ Xinfeng Nie
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Name:
Xinfeng Nie
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Title:
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DING
NENG SHAREHOLDERS:
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NIE
XINGFENG CO., LTD.
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By:
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/s/ Xinfeng Nie
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Xinfeng
Nie
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SANFU
HOLDING CO., LTD.
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By:
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/s/ Gaomin Huang
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Gaomin
Huang
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[SIGNATURE
PAGE TO SHARE EXCHANGE AGREEMENT, CONTINUED]
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ZEWEN
HOLDING CO., LTD.
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By:
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/s/ Zewen Lin
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Name:
Zewen Lin
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Title:
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WEALTH
INDEX CAPITAL GROUP LLC
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By:
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/s/ Shanchun Huang
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Name:
Shanchun Huang
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Title:
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H.X.Z
BEYOND INVESTMENT CONSULTING CO., LTD.
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By:
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/s/ Xuzhong Han
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Name:
Xuzhong Han
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Title:
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ZHR
CAPITAL LIMITED
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By:
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/s/ Fulun Su
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Name:
Fulun Su
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Title:
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[SIGNATURE
PAGE TO SHARE EXCHANGE AGREEMENT, CONTINUED]
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YUXUAN
HOLDING CO., LTD.
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By:
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/s/ Yuxuan Huang
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Name:
Yuxuan Huang
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Title
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LINGPENG
HOLDING CO., LTD.
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By:
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/s/ Lingpeng Liu
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Name:
Lingpeng Liu
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Title:
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M.Y.
LIN HOLDING CO., LTD.
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By:
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/s/ Mingyuan Lin
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Name:
Mingyuan Lin
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Title:
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LINGBIN
HOLDING CO., LTD.
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By:
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/s/ Lingbin Xie
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Name:
Lingbin Xie
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Title:
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[SIGNATURE
PAGE TO SHARE EXCHANGE AGREEMENT, CONTINUED]
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YANGHONG
HOLDING CO., LTD.
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By:
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/s/ Yanghong Pan
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Name:
Yanghong Pan
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Title:
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KINGFISHER
EQUITY HOLDING CO., LTD.
|
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By:
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/s/ Yue Sun
|
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Name:
Yue Sun
|
|
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Title:
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MAXIM
PARTNERS LLC
|
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|
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By:
|
/s/ Michael
Rabinowitz
|
|
|
|
Name:
Michael Rabinowitz
|
|
|
Title:
Chairman
|
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DAYSPRING
CAPITAL, LLC
|
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By:
|
/s/ Karl Brenza
|
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Name:
Karl Brenza
|
|
|
Title:
|
Schedule
A
Ding
Neng Shareholders
|
Name Of
Shareholder
|
|
Address
|
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Shares of Ding
Neng Holdings
Held
|
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|
Percentage of
Ding Neng Holdings
Shares
Held Prior to the
Exchange
|
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Shares of CIC to
be Received Upon
Exchange (Post
Reverse-Split)
|
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Nie
Xingfeng Co., Ltd.
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P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
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15,705
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31.41
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%
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Sanfu
Holding Co., Ltd.
|
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P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
|
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11,095
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22.19
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%
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Zewen
Holding Co., Ltd.
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P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
|
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5,450
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10.90
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%
|
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Wealth
Index Capital Group LLC
|
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Naaman’s
Building, Suite 206, 3501 Silverside Road, Wilmington,
Delaware
|
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3,000
|
|
|
|
6.00
|
%
|
|
|
|
|
|
H.X.Z
Beyond Investment Consulting Co., Ltd
|
|
P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
|
|
|
1,500
|
|
|
|
3.00
|
%
|
|
|
|
|
|
ZHR
Capital Limited
|
|
Unit
2508A, 25F, Bank of America Tower, Central Hong Kong
|
|
|
2,500
|
|
|
|
5.00
|
%
|
|
|
|
|
|
Yuxuan
Holding Co., Ltd
|
|
P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
|
|
|
2,000
|
|
|
|
4.00
|
%
|
|
|
|
|
|
Lingpeng
Holding Co., Ltd.
|
|
P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
|
|
|
2,000
|
|
|
|
4.00
|
%
|
|
|
|
|
|
M.Y.
Lin Holding Co., Ltd.
|
|
P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
|
|
|
2,000
|
|
|
|
4.00
|
%
|
|
|
|
|
|
Lingbin
Holding Co., Ltd.
|
|
P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
|
|
|
2,000
|
|
|
|
4.00
|
%
|
|
|
|
|
|
Yanghong
Holding Co., Ltd.
|
|
P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
|
|
|
2,000
|
|
|
|
4.00
|
%
|
|
|
|
|
|
Kingfisher
Equity Holding Co., Ltd.
|
|
P.O.
Box 957, Offshore
Incorporations
Center,
Road
Town, Tortola,
British
Virgin Islands
|
|
|
250
|
|
|
|
0.50
|
%
|
|
|
|
|
|
Maxim
Partners LLC
|
|
405
Lexington Avenue,
New York, NY 10174
|
|
|
250
|
|
|
|
0.50
|
%
|
|
|
|
|
|
Dayspring
Capital, LLC
|
|
26
Cherry Street, Katonah, NY 20536
|
|
|
250
|
|
|
|
0.50
|
%
|
|
|
|
|
ANNEX B
AMENDMENT
TO THE SHARE EXCHANGE AGREEMENT
This AMENDMENT TO THE SHARE EXCHANGE
AGREEMENT (this “
Amendment
”) is made and
entered into this 6
th
day of
December, 2010, by and among China INSOnline Corp., a Delaware corporation
(hereinafter referred to as “
CIC
”), Ding Neng Holdings
Limited, a British Virgin Islands business company (“
Ding Neng”
) and the
shareholders of Ding Neng signatory hereto (collectively, the “
Ding Neng
Shareholders
”).
RECITALS
WHEREAS,
CIC, Ding Neng and the Ding Neng Shareholders entered into that certain Share
Exchange Agreement dated November 12, 2010 (the “
SEA
”), pursuant to which,
among other things, CIC agreed to acquire 100% of the issued and outstanding
equity securities of Ding Neng (the “
Ding Neng Shares
”) from the
Ding Neng Shareholders in exchange (the “
Exchange
”) for the issuance by
CIC to the Ding Neng Shareholders of a number of newly issued shares (the
“Exchange Shares”
) of CIC’s
common stock, par value $0.001 per share (the “
Common
Stock
”) representing an aggregate of 85% (subject to adjustment as
set forth in the SEA) of the issued and outstanding shares of Common Stock
immediately following the Closing, and the Ding Neng Shareholders agreed to
exchange their respective Ding Neng Shares for the Exchange Shares on the terms
described therein.
WHEREAS,
each of CIC, Ding Neng and the Ding Neng Shareholders wish to amend certain
terms and provisions of the SEA as set forth herein.
NOW
THEREFORE, in consideration of the premises and mutual agreements and covenants
set forth herein, and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
ARTICLE
I
Defined
Terms
Section
1.1 Capitalized terms used
and not otherwise defined herein shall have the meanings given to such terms in
the SEA.
ARTICLE
II
Amendments
to SEA
Section
2.1. The fifth (5
th
) and
sixth “Whereas” clauses on the first page of the SEA is hereby amended and
restated in its entirety to read as follows:
“WHEREAS
, CIC proposes to
acquire 100% of the issued and outstanding equity securities of Ding Neng (the
“
Ding Neng Shares
”) from
the Ding Neng Shareholders in exchange (the “
Exchange
”) for the issuance by
CIC to the Ding Neng Shareholders of a number of newly issued shares (the
“Exchange Shares”
) of CIC’s
common stock, par value $0.001 per share (the “
Common
Stock
”) representing an aggregate of 90% (subject to adjustment as
set forth herein) of the issued and outstanding shares of Common Stock
immediately following the Closing, and the Ding Neng Shareholders desire to
exchange their respective Ding Neng Shares for the Exchange Shares on the terms
described herein; and
WHEREAS,
prior to the closing
of the Exchange (the
“Closing
”), (1) the
Company shall have undertaken a reverse split of the Common Stock on a 1:40
basis (the “
Reverse
Split
”) and (2) CIC shall obtain all necessary approvals and consents
(including, but not limited to, such required approvals from
FINRA) required to change its name to China Bio-Energy Corp. effective as
of the Closing (the
“Name
Change”
); and”
Section
2.2. Section 4.01(b) of the SEA
is hereby amended and restated in its entirety to read as follows:
“In
consideration of the transfer of the Ding Neng Shares to CIC by the Ding Neng
Shareholders, CIC shall cause the Exchange Shares to be issued to the Ding Neng
Shareholders in the amounts set forth on
Schedule A
hereto,
representing in the aggregate 90% of the issued and outstanding shares of Common
Stock immediately following the Closing, pursuant to an irrevocable letter
executed by CIC, addressed to Corporate Stock Transfer, Inc., CIC’s transfer
agent (the
“Transfer Agent
Letter”
), attached hereto as
Exhibit A
, and dated
as of the Closing Date. Notwithstanding the foregoing, in the event
Greenstone Holdings Group LLC, or any of subsidiaries, affiliates or related
parties (collectively, “
Greenstone
”) owns any shares
of Common Stock, directly or indirectly (including shares of Common Stock
underlying warrants, options or other derivative securities convertible into
shares of Common Stock), or has the right to receive or acquire shares of Common
Stock, the Ding Neng Shareholders shall be entitled to receive an additional
number of shares of Common Stock such that the Ding Neng Shareholders actually
received an aggregate number of shares of Common Stock equal to 90% of the
issued and outstanding shares of Common Stock immediately following the
Closing. The provisions of this Section 4.01(b) shall survive the
Closing for a period of two (2) years.”
Section
2.3. Section 7.02 of the SEA is
hereby amended and restated in its entirety to read as follows:
“Section
7.02
Maintenance of
Listing
. CIC shall continuously be quoted on the Pink Sheets,
the OTC Bulletin Board or the NASDAQ Capital Market from the date hereof through
the Closing Date.
Section
2.4. Section 7.11 of the SEA is
hereby amended and restated in its entirety to read as follows:
“Section
7.11
Existing
Liabilities
. As of the Closing Date, the existing liabilities of CIC do
not exceed $250,000, including, without limitation, all of CIC’s accounts
payable, taxes of any kind or nature (whether due or to become due) and any
outstanding legal or other fees, costs and expenses, all as incurred prior to
the Closing Date.”
ARTICLE
III
Miscellaneous
Section
3.1.
References
. All
references in the SEA to “Agreement,” “herein,” “hereof,” or terms of like
import referring to the Agreement or any portion thereof are hereby amended to
refer to the SEA as amended by this Amendment.
Section
3.2.
Effect of
Amendment
. Except as and to the extent expressly modified by
this Amendment, the SEA (including all schedules and exhibits thereto) shall
remain in full force and effect in all respects, and the parties hereto hereby
reaffirm and approve the SEA as amended by this Amendment.
[Signature
Page Follows]
IN
WITNESS WHEREOF, the parties hereto have caused this Amendment to be signed and
delivered by their respective duly authorized officers as of the date first
above written.
|
|
CHINA
INSONLINE CORP.
|
|
|
|
|
|
By:
|
/s/ ZhenyuWang
|
|
|
Name:
ZhenyuWang
|
|
|
Title: Chief
Executive Officer
|
|
|
|
|
|
|
DING
NENG HOLDINGS LIMITED
|
|
|
|
|
|
|
By:
|
/s/ Xinfeng Nie
|
|
|
Name:
Xinfeng Nie
|
|
|
Title:
|
|
|
|
|
|
|
DING
NENG SHAREHOLDERS:
|
|
|
|
|
|
|
NIE
XINGFENG CO., LTD.
|
|
|
|
|
|
|
By:
|
/s/
Xinfeng
Nie
|
|
|
Xinfeng
Nie
|
|
|
|
|
|
SANFU
HOLDING CO., LTD.
|
|
|
|
|
|
By:
|
/s/
Gaomin
Huang
|
|
|
Gaomin
Huang
|
|
[SIGNATURE
PAGE TO AMENDMENT TO SHARE EXCHANGE AGREEMENT,
CONTINUED]
|
|
|
|
|
|
|
ZEWEN
HOLDING CO., LTD.
|
|
|
|
|
|
By:
|
/s/ Zewen Lin
|
|
|
|
Name:
Zewen Lin
|
|
|
|
Title:
|
|
|
|
|
|
WEALTH
INDEX CAPITAL GROUP LLC
|
|
|
|
|
|
By:
|
/s/ Shanchun Huang
|
|
|
|
Name:
Shanchun Huang
|
|
|
|
Title:
|
|
|
|
|
|
H.X.Z
BEYOND INVESTMENT CONSULTING CO., LTD.
|
|
|
|
|
|
By:
|
/s/ Xuzhong Han
|
|
|
|
Name:
Xuzhong Han
|
|
|
|
Title:
|
|
|
|
|
|
ZHR
CAPITAL LIMITED
|
|
|
|
|
|
By:
|
/s/ Fulun Su
|
|
|
|
Name:
Fulun Su
|
|
|
|
Title:
|
|
[SIGNATURE
PAGE TO AMENDMENT TO SHARE EXCHANGE AGREEMENT,
CONTINUED]
|
|
|
|
|
|
|
YUXUAN
HOLDING CO., LTD.
|
|
|
|
|
|
By:
|
/s/ Yuxuan Huang
|
|
|
|
Name:
Yuxuan Huang
|
|
|
|
Title:
|
|
|
|
|
|
LINGPENG
HOLDING CO., LTD.
|
|
|
|
|
|
By:
|
/s/ Lingpeng Liu
|
|
|
|
Name:
Lingpeng Liu
|
|
|
|
Title:
|
|
|
|
|
|
M.Y.
LIN HOLDING CO., LTD.
|
|
|
|
|
|
By:
|
/s/ Mingyuan Lin
|
|
|
|
Name:
Mingyuan Lin
|
|
|
|
Title:
|
|
|
|
|
|
LINGBIN
HOLDING CO., LTD.
|
|
|
|
|
|
By:
|
/s/ Lingbin Xie
|
|
|
|
Name:
Lingbin Xie
|
|
|
|
Title:
|
|
[SIGNATURE
PAGE TO AMENDMENT TO SHARE EXCHANGE AGREEMENT,
CONTINUED]
|
|
|
|
|
|
|
YANGHONG
HOLDING CO., LTD.
|
|
|
|
|
|
By:
|
/s/ Yanghong Pan
|
|
|
|
Name:
Yanghong Pan
|
|
|
|
Title:
|
|
|
|
|
|
KINGFISHER
EQUITY HOLDING CO., LTD.
|
|
|
|
|
|
By:
|
/s/ Yue Sun
|
|
|
|
Name:
Yue Sun
|
|
|
|
Title:
|
|
|
|
|
|
MAXIM
PARTNERS LLC
|
|
|
|
|
|
By:
|
/s/ Michael Rabinowitz
|
|
|
|
Name:
Michael Rabinowitz
|
|
|
|
Title:
Chairman
|
|
|
|
|
|
DAYSPRING
CAPITAL, LLC
|
|
|
|
|
|
By:
|
/s/ Karl Brenza
|
|
|
|
Name:
Karl Brenza
|
|
|
|
Title:
Sole Member
|
ANNEX
C
CERTIFICATE
OF AMENDMENT
OF
CERTIFICATE
OF INCORPORATION
FOR
REVERSE
STOCK SPLIT
CERTIFICATE
OF AMENDMENT
OF
THE
CERTIFICATE OF INCORPORATION
OF
CHINA
INSONLINE CORP.
The
Corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the “
DGCL
”) does hereby
certify:
1. The
name of the Corporation is CHINA INSONLINE CORP. (the “
Corporation
”).
2. Article
FOURTH of the Certificate of Incorporation of the Corporation (the “
Certificate of Incorporation
”)
is hereby amended by deleting Article FOURTH in its entirety and replacing it
with the following:
“4. The
aggregate number of shares of capital stock that the Corporation will have the
authority to issue is one hundred million (100,000,000) shares of common stock,
par value $0.001 per share (the “Common Stock”).
(a)
Reverse Stock
Split.
Without regard to any other provision of this
Certificate of Incorporation, each 40 shares of Common Stock of the
Corporation, either issued and outstanding or held by the Corporation as
treasury stock, immediately prior to the time this amendment becomes effective
shall be and is automatically reclassified and changed (without any further act)
into one (1) fully paid and nonassessable share of Common Stock of the
Corporation without increasing or decreasing the amount of stated capital or
paid-in surplus of the Corporation, provided that no fractional shares or scrip
representing fractions of a share will be issued as a result of the reverse
stock split, but, in lieu thereof, each fraction of a share that any stockholder
would otherwise be entitled to receive as a result of the reverse stock split
will be rounded up to the nearest whole share.”
3. This
amendment of the Certificate of Incorporation herein certified has been duly
adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
IN
WITNESS WHEREOF, said Corporation has caused this certificate to be signed this
___ day of __________ 2011.
|
|
CHINA
INSONLINE CORP.
|
|
|
|
|
|
|
By:
|
|
|
|
|
Name:
|
Zhenyu
Wang
|
|
|
Title:
|
Chief
Executive Officer
|
ANNEX
D
CERTIFICATE
OF AMENDMENT
OF
CERTIFICATE
OF INCORPORATION
FOR
NAME
CHANGE
CERTIFICATE
OF AMENDMENT
OF
THE
CERTIFICATE OF INCORPORATION
OF
CHINA
INSONLINE CORP.
The
Corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the “
DGCL
”) does hereby
certify:
1. The
name of the Corporation is CHINA INSONLINE CORP. (the “
Corporation
”).
2. Article
One of the Certificate of Incorporation of the Corporation (the “
Certificate of Incorporation
”)
is hereby amended by deleting Article One in its entirety and replacing it with
the following:
“1. The
name of the corporation (the “Corporation”) is China Bio-Energy
Corp.”
3. This
amendment of the Certificate of Incorporation herein certified has been duly
adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
IN
WITNESS WHEREOF, said Corporation has caused this certificate to be signed this
___ day of __________ 2011.
|
|
CHINA
INSONLINE CORP.
|
|
|
|
|
|
|
By:
|
|
|
|
|
Name:
|
Zhenyu
Wang
|
|
|
Title:
|
Chief
Executive Officer
|
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